Transformation
for Excellence
Annual Report 2017
12 In this Report:
02 OVERVIEW
04 About O’KEY Group
08 Financial & Operational Highlights
10 Highlights of 2017
12 STRATEGIC REPORT
14 O’KEY CEO’s Statement
15 DA! CEO’s Statement
16 Russia’s Food Retail Market
18 Delivering on Our Strategy
20 OPERATIONAL REVIEW
22 Hypermarkets
34 Discounters
38 MANAGEMENT DISCUSSION
AND ANALYSIS
42 CORPORATE SOCIAL RESPONSIBILITY
52 CORPORATE GOVERNANCE
54 Corporate Governance System
62 Risk Management System
66
69 Management & Directors Responsibility
Information for Shareholders and Investors
Statement
70 FINANCIAL STATEMENTS
71 Report of the Réviseur D`Entreprises Agréé
76 Consolidated Financial Statements
81 Notes to the Consolidated Financial Statements
117 GLOSSARY
118 CONTACTS
MORE AVAILABLE ONLINE
You can learn about O’KEY Group’s strategy, our
businesses and performance, approach to governance
and risk online, where latest and archived annual and
strategic reports are available to view or download.
For further information and a fuller understanding of
the results and the state of affairs of the Group, please
refer to the full suite of documents at
www.okeyinvestors.ru
O’KEY Group of Companies 01
About the Report
This Annual Report 2017 (the ‘Report’) has been prepared by O’KEY GROUP S.A.
(‘O’KEY Group’, the ‘Group’, or the ‘Company’).
This Report discloses information on the implementation of the Group’s strategy
in 2017, presents the Group’s operating and financial results, describes the Group’s
corporate governance system and corporate social responsibility. The Report has
been prepared based on consolidated IFRS financial statements for 2017.
The Report has been prepared based on the information available to the Group as
at the time when this Report was prepared, including information obtained from
third parties. The Company reasonably believes that this information is complete
and accurate as at the publication date of this Report; however, it does not make
any representation or warranty that this information will not be updated, revised, or
otherwise amended in the future.
This Report includes estimates or forward-looking statements related to operating,
financial, economic, social and other measures that can be used to assess the
performance of O’KEY GROUP S.A. The Company does not make any representation
or warranty that the results anticipated by such forwardlooking statements will be
achieved. The Company shall not be liable to any individual or legal entity for any loss
or damage which may arise from their reliance on such forward-looking statements.
Annual Report 2017 OVERVIEW
02
02 Overview
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
OUR VISION
The best compact hypermarket
The best value for money discounter
OUR MISSION
We strive for excellence
We provide a simple and easy shopping experience
We aim to create an effective working environment
O’KEY Group of Companies
0303
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
O u t s t a nding results
I
m
p
e
c
c
a
b
l
e
s
e
r
v
i
c
e
OUR
VALUES
ess
n
e
tiv
a
v
o
n
n
I
E
ff
e
c
tiv
e team
o f e ssio nalism
A t m o s p here
r
o f p
Annual Report 2017
OVERVIEW
04
04 About O’KEY Group
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
O’KEY Group is one of the largest retail chains in Russia. The Group
operates two main formats: hypermarkets under the O’KEY brand
and discounters under the DA! brand. O’KEY Group opened its first
hypermarket in St. Petersburg in 2002 and has shown continuous
growth since then. O’KEY is the first Russian food retailer to launch
and actively develop e-commerce operations in St. Petersburg and
Moscow, offering a full range of products for home delivery.
KEY FACTS:
Experienced international management team
One of the market leaders in St. Petersburg
with a strong presence in Moscow and other
large cities in Russia
Strong brand known for the quality of
products and best-in-class shopping
experience
Two differentiated formats of modern food
retail: hypermarket and discounter formats
Highly centralised logistics: the Group
operates 4 distribution centres across the
Russian Federation
About 23,000 employees
O’KEY Group of Companies
05
15
years
of history
145
total number
of stores
4
distribution
centres
577.8
of selling space,
K m2
177.5
total Group revenue
in 2017, RUB bn
12.8%
CAGR revenue, growth
in RUB terms (2009-2017)
Annual Report 2017 OVERVIEW
06
OUR HISTORY
2002 2003 2007 2009
O’KEY GROUP was
founded
FIRST O’KEY
HYPERMARKET
opened in
St. Petersburg
Strategy of establishing
REGIONAL MARKET
LEADERSHIP
Focus on EXPANSION
in Russia’s key regional
markets
8 HYPERMARKETS
6 NEW REGIONS
AND 2 SUPERMARKETS
opened in St. Petersburg
TOP-10 retailer by
revenue
37 total stores
DOUBLED selling space
to >190 K m2
OWN PRODUCTION
launched in 2003
×15 TIMES increased
selling space to 87 K m2
NEW FORMAT launched
FIRST SUPERMARKET
opened in 2006
OUR GEOGRAPHY
145 total number
of stores
Number of stores by format (year end)
2017
2016
2015
2014
2013
73
5
74
71
69
36
40
39
108
60
34
94
67
145
54
164
35
146
Emergence as a ONE
OF THE LEADING
national Russian
retailers
RAPID EXPANSION
in Moscow and key
regional markets
IPO on the London
Stock Exchange
TOP-3 retailer
by revenue
>100 total stores
>550 K m2 selling space
73
Hypermarkets
67
Discounter stores
51
Supermarkets
St. Petersburg
1
22
1
Murmansk
Moscow
2
11
Ivanovo
1
Syktyvkar
1
3
Lipetsk
1
2
Voronezh
Nizhny Novgorod
1
1
Saratov
1
Togliatti
3
Ufa
2
Surgut
3
Yekaterinburg
3
Tyumen
Rostov-on-Don
2
Krasnodar
4
Sochi
1
Volgograd
1
Stavropol
1
2
Astrakhan
1
Orenburg
Hypermarket
Supermarket
Discounter store
Distribution centre for hypermarkets
Distribution centre for discounter stores
1
1
Omsk
2
Novosibirsk
2
Krasnoyarsk
1
Irkutsk
1 In 2017, the Company sold a supermarket business consisting of 32 stores. The remaining five supermarkets will be refurbished into compact hypermarkets in 2018.
O’KEY Group of Companies 07
2015 2016 2017
ONLINE SALES
PLATFORM launched
for market-leading
hypermarket
STRENGTHENING
of international
management team
NEW DISCOUNTER
FORMAT under the DA!
brand
146 total stores
>590 K m2 selling space
40% logistics
centralisation level
Presence in
27 REGIONS
MOBILE APP for iOS
and Android launched
in 2016
164 total stores
>600 K m2 selling
space
STRATEGIC PARTNERSHIP WITH FAMILIA
the leading off-price retailer in Russia
O’KEY-AUTO AND 24 HOUR DELIVERY SERVICE
launched for hypermarket segment
SALE OF SUPERMARKET BUSINESS including
32 supermarkets over Russia
145 total stores
>577 K m2 selling space
St. Petersburg
1
22
Moscow
2
11
1
Murmansk
2
Tver region
14
Moscow
39
Moscow region
Kaluga region 3
Tula region
6
3
Ryazan region
Lipetsk
2
1
Voronezh
Rostov-on-Don
2
Krasnodar
4
Volgograd
1
1
Saratov
1
Sochi
1
1
Stavropol
1
3
Ivanovo
1
Syktyvkar
Nizhny Novgorod
1
Togliatti
3
Ufa
2
Surgut
3
Yekaterinburg
3
Tyumen
51
Supermarkets
2
Astrakhan
1
Orenburg
Hypermarket
Supermarket
Discounter store
Distribution centre for hypermarkets
Distribution centre for discounter stores
1
1
Omsk
2
Novosibirsk
2
Krasnoyarsk
1
Irkutsk
Annual Report 2017 OVERVIEW
08
08 Financial & Operational
i
s
e
n
a
p
m
o
C
Highlights
f
o
p
u
o
r
G
Y
E
K
O
’
FINANCIAL HIGHLIGHTS
Total revenue, RUB bn
O’KEY Revenue, RUB bn
DA! Revenue, RUB bn
2017
2016
2015
2014
2013
177.5
175.5
162.5
151.9
139.5
2017
2016
2015
2014
2013
167.1
2017
10.4
169.7
2016
5.8
161.8
2015
0.7
151.9
139.5
Group EBITDA, RUB bn
O’KEY EBITDA, RUB bn
DA! EBITDA, RUB bn
2017
2016
2015
2014
2013
9.3
9.3
10.1
11.3
11.0
2017
2016
2015
2014
2013
11.4
2017
-2.0
2016
-2.6
2015
-1.6
11.8
11.7
11.3
11.0
O’KEY Group of Companies
0909
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
OPERATIONAL HIGHLIGHTS
Gross profit, RUB bn
Net retail revenue, RUB bn
Total selling space, K m2
2017
2016
2015
2014
2013
40.4
40.2
38.4
37.2
33.3
2017
2016
2015
2014
2013
174.3
172.5
160.3
149.9
137.6
2017
2016
2015
2014
2013
577.8
622.9
593
552
489
Net profit/loss, RUB bn
Traffic, mln
Number of stores
3.2
1.9
2017
2016
-0.1
2015
2014
2013
5.2
4.9
2017
2016
2015
2014
2013
227.7
226.8
207.4
193.5
185.6
2017
2016
2015
2014
2013
145
146
164
108
94
Annual Report 2017
OVERVIEW
1010
Highlights of 2017
Jan
21
O’KEY Group arranged a fair of locally produced
cheese with the support of the Republic of
Bashkortostan, State Committee on Trade and
Consumer Protection.
1—28
Feb
O’KEY Group in partnership with one of the largest
fundraising Charity Foundations Rusfond held
a charity event ‘Buy a toy – save a child’s life’ as part
of the charity programme ‘Kind Purchase’.
Mar
2
O’KEY Group launched O’KEY Auto, a new service
within its Online Shopping platform, which allows
its customers to have the groceries delivered right
to their car.
Mar
22
O’KEY Group announced the appointment of
Miodrag Borojevic as its new Chief Executive Officer
of the hypermarket & supermarket business.
Mar
30
Within 3 months, the number of ‘ROSBANK O’KEY
Mastercard’ co-branded credit cards exceeded
60,000.
Apr
11
At the Fourth International PRIVATE LABEL AWARDS
in 2017 held by IPLS, O’KEY Group received the
highest award in the category ‘Best private label in
Non-food’ in the economy segment and two other
nominations in the ‘Best private label in Economy
segment’ and ‘Responsible approach to private
label’ categories.
May
10
O’KEY Group’s River House hypermarket in
St. Petersburg passed the certification procedure
and received the ‘St. Petersburg mark
of quality’ in the retail category.
O’KEY Group of Companies
11
Sep
22
One of the O’KEY Group hypermarkets received an
award in the category ‘Best Specialised Retailer in
St. Petersburg’ in the XIII annual Golden Hermes
contest , conducted with the support of the
St. Petersburg City Administration in the urban
consumer market.
Dec
13
O’KEY Group has launched a fundamentally
new trading format in Russia. The first compact
hypermarket with an area of 5 K m2, comprising
special areas for ‘ultra fresh’ and ‘fresh’ products, has
been opened in Yekaterinburg.
May
26
O’KEY Group Online Shop announced 24-hour
delivery service of products to Moscow customers.
May
28
The annual international creative festival for children
and youth with disabilities ‘Step towards!’ was held in
St. Petersburg for the tenth time with the support of
O’KEY Group.
Jul
10
O’KEY Group announced a strategic partnership with
Familia, the leading off-price retailer in Russia.
O’KEY Group announced the appointment of Ivan
Dropuljic as Commercial Operations Director of the
hypermarket & supermarket business.
Dec
15
O’KEY Group and X5 Retail Group have reached
an agreement for X5 to acquire the supermarkets
business currently operating under the O’KEY brand1.
1 In 2017, the Company sold a supermarket business consisting of
32 stores. The remaining five supermarkets will be refurbished into
compact hypermarkets in 2018.
Annual Report 2017 STRATEGIC REPORT
12
12 Strategic Report
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
The Group managed to withstand the challenges of
a competitive market environment and achieved strong results
that matched our expectations. We continued to implement
our business transformation plan by sale of supermarkets
business and revamping our focus on the hypermarkets and
discounter store segments. We are confident these initiatives
will help the Group to fully realise its growth strategy.
O’KEY Group of Companies
Strategic Report
1313
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
Annual Report 2017
STRATEGIC REPORT
14
O’KEY CEO’s
Statement
DEAR STAKEHOLDERS,
In 2017, the economy demonstrated the first signs
of recovery supported by gradual improvement of
consumer sentiment. At the same time the competitive
environment in retail sector remained strong. Aggressive
selling space growth ahead of food retail sales continued
to put pressure on the performance of more mature
stores.
In 2017, the Group made a strategic decision to focus on
its key businesses: hypermarkets under the O’KEY brand
where it already has strong footprint, and on the rapidly
growing discounters segment under the DA! brand
which has proven successful and has significant potential
for further growth. The sale of supermarket business
completed in 2017 will help the Group to concentrate
on these two areas where we see the most promising
opportunities for the Group.
The Group’s strategy remains centred on ensuring
the best shopping experience for our clients. The Group
strives to become a destination point for its customers,
offering a wide range of opportunities for convenient
and high quality shopping.
Throughout the year, the Russian retail market remained
highly competitive, encouraging O’KEY to introduce
a new commercial model, new marketing initiatives
and further product range improvements. One of our
priorities in 2017 was to change customer perceptions
of our price proposition. Therefore, we put considerable
marketing efforts into the promotion of our new
commercial model that aims to guarantee the best
value for money for our customers. These steps helped
O’KEY to reverse the traffic outflow observed in the
first half of the year and build strong fundamentals for
correcting price perceptions and growing brand loyalty
of customers. In addition, we continued to develop
our e-commerce platform and significantly improved
the functionality of our mobile app and website which
enabled us to achieve record online sales in 2017.
We constantly seek out opportunities to increase the
efficiency of the hypermarket selling space. With this in
mind, we continued to develop the format of compact
hypermarkets and signed an agreement for a strategic
partnership with Familia, the leading off-price retailer in
Russia. This strategic alliance will provide opportunities
to grow EBITDA per m2 by securing additional rent
income and boosting customer traffic.
To further streamline our operations, we carried out a
restructuring of our head office in 2017 which has made
our organisational structure even more transparent
and efficient. During the year we worked tirelessly to
increase overall operational efficiency and enhance
the centralisation rate of our supply chain. The latter
improved to almost 60% by the end of 2017 from around
40% a year before.
In 2017, we also strengthened our management team
by introducing Ivan Dropuljic as our new Commercial
Operations Director. Mr Dropuljic will lead the
combined forces of our commercial, marketing, space
management and quality control departments. We
believe that this level of centralisation in our commercial
operations will be highly beneficial for O’KEY’s strategic
development.
O’KEY employs over 21,000 people, and each member
of our team matters. We believe that our strong
corporate values, team expertise and strategic vision are
integral in securing our success in the years to come.
In 2018, we will continue work for the benefit of all our
stakeholders, and I firmly believe that together we are
able to achieve all our goals, strengthen our market
position and provide our customers with even more
moments of unforgettable shopping.
Miodrag Borojevic
CEO of O’KEY
O’KEY Group of Companies DA! CEO’s
Statement
DEAR STAKEHOLDERS,
In 2017, DA! achieved solid operating results, leaving us
very pleased with the pace of growth. Net retail revenue
increased by 81.5% YoY to RUB 10.2 bn. LFL net retail
revenue generated by DA! increased by 52.0% YoY, driven
by a 34.8% YoY increase in LFL traffic and a 12.7% YoY
increase in LFL average ticket. EBITDA generated by DA!
improved from negative RUB 2,592 mln (44.9% of sales)
in 2016 to negative RUB 2,024 mln (19.5% of sales) in
2017 driven by new store openings and higher LFL sales.
In 2017, 13 new stores were opened in Moscow and
the Moscow Region, pushing the total number of our
discounters to 67 with a total selling space of 46.2 K m2.
During the year, we put significant effort into improving
our value proposition and introduced a large number
of high quality private label brand products, many of
which are produced exclusively for DA!. At the same
time, we continued to exercise close control over the
total number of SKUs on our shelves. Having a compact
product range carefully tailored to the needs of our
customers is integral to the success of our business
and enables us to achieve higher turnover per m2 while
maintaining lower in-store operating costs. Ultimately,
this enabled us to secure consistent price levels
throughout the year and further increase the price
gap between DA! and our main competitors.
In 2017, we also focused on building a more positive in-
shop environment and improving the overall customer
experience. To achieve this, we conducted numerous
staff training sessions, ensuring that our employees
15
not only provide the highest level of customer service,
but also enjoy their working environment and become
drivers of our in-store productivity.
In 2018, we intend to continue with the accelerated
expansion of discounters in Moscow and surrounding
regions and plan to open up to 30 DA! stores. We are
confident that the discounter segment has significant
growth potential in the price-sensitive Russian market.
I am confident that our strategic approach to delivering
the best value-for-money proposition will enable DA! to
establish itself among the leading Russian food retailer
brands in the near future.
Armin Burger
CEO of DA!
Annual Report 2017 STRATEGIC REPORT
16
Russia’s Food Retail Market
MARKET IN 2017
Having suffered several years of headwinds arising from
weak oil prices, interest rate increases and the impact
of international sanctions in 2017 Russian economy
demonstrated the signs of recovery. Supported by slowing
inflation and growing real wages throughout 2016-2017
Russian food retail sales moved to positive territory,
posting 4.4% YoY growth in 2017.
Despite the gradual recovery on the macro front, the
operating environment remained challenging in 2017.
While consumer demand demonstrated modest signs of
recovery, and consumer confidence remained healthy
overall, the supply-side recorded disproportionate
growth owing to the aggressive pursuit of selling space
expansion on the part of retailers. According to Infoline,
the top 10 retailers added 2.2 mln m2 in additional space
in 2017, 15.2% growth YoY, with the three largest retailers
accounting for 84% of this growth. The continuous
aggressive roll-out of the selling space across top-10
retailers on the one hand remained the key pillar of the
double digit net retail revenue growth in 2017, on the other
hand continued to dilute the sales density and cannibalise
not only competitors stores, but their own store base as
well.
As a result of aggressive selling space roll-out, modern
trade penetration reached 71% (according Goldman Sachs
research) as of the end of the year and is estimated to
increase up to 81% in the next several years in line with
developed market levels.
However, the nature of the penetration is rather uneven
with one third of Russian territory accounting for 85% of
the retail market and quite fragmented with top-5 retailers
accounting for around quarter of the market. While the
former is the function of the low population density in
Russia (one of the lowest in the world) suggesting the
potential growth to come from already well-penetrated
regions, the latter sets the solid ground for market
consolidation around the largest players. This suggest
the room for larger players, such as O’KEY, to deliver
sustainable growth, using differentiated formats to reach
target consumer segments.
Building our strategy around two main formats – compact
hypermarkets and discounters – we aim to cover the
needs and preferences of all consumer segments.
Striving for efficiency and productivity across all business
processes in our compact hypermarkets, we aim to
create a distinctive competitive advantage in the food
retail market, attracting new customers and increasing
customer loyalty by greatly expanding the range of
consumer needs that can be met in a single location.
We remain committed to developing a unique for Russia
value-for-money discounter concept with an aim to
become a destination point. The results demonstrated by
the segment in 2017 are very encouraging and we aspire
to continue the active store roll-out in 2018.
O’KEY Group of Companies
Real GDP growth, %
Russia Consumer Price Index 2014-2017, Monthly YoY %
17
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
25%
20%
15%
10%
5%
0%
-5%
jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov
2014
2015
2016
2017
2011
2012
2013
2014
2015
2016
2017F
CPI
Food CPI
Source: Rosstat
Source: Rosstat
Real Wages 2014-2017, Monthly YoY %
10%
5%
0%
-5%
-10%
-15%
jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov
Retail Sales and Food Retail Sales Growth 2014-2017,
real terms, Monthly YoY %
10%
5%
0%
-5%
-10%
-15%
-20%
jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov
2014
2015
2016
2017
2014
2015
2016
2017
Source: Rosstat
Retail sales
Food retail sales
Source: Rosstat
Russia Consumer Confidence Index, 2014-2017, Monthly YoY %
OUTLOOK
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2014
2015
2016
2017
Source: Rosstat
Modern Trade Penetration 2014-2017
72%
70%
68%
66%
64%
62%
60%
58%
2014
2015
2016
2017
Source: Infoline
Given official estimates place real GDP growth in Russia
in 2018-2019 within the range of 2 to 2.2%, we remain
cautiously optimistic on the outlook for the Russian
economy. We expect that the marginal recovery of
consumer sentiment witnessed in 2017 will continue
in 2018, though competitive pressures will continue to
weight on the market. Taking into account that the level
of modern trade penetration in Russia increased to 71%
by the end of the year, we contend that going forward
sales densities will tend to decline driven by increasing
competition.
While we do see some upside from a recovery in
consumer spending through improvement in real
wages and slowing inflation, our strategy is based on a
more cautious scenario. We believe by investing in our
business today to enhance efficiency and ensure price
competitiveness alongside our established reputation for
quality and service, we will be one of the best-positioned
retailers in the Russian marketplace to benefit from market
growth opportunities.
Annual Report 2017 STRATEGIC REPORT
i
s
e
n
a
p
m
o
C
18 Delivering
on Our
Strategy
f
o
p
u
o
r
G
Y
E
K
O
’
The Group’s strategy is
built around developing
a modern food retailer
in Russia, operating
in hypermarket and
discounter formats.
Within our strategy, we
aspire to deliver the
highest quality, best-
value proposition and
a unique customer
experience.
In 2017, the Board of Directors
made strategic decision to
focus on its key businesses:
hypermarkets under the O’KEY
brand where it already has
strong footprint, and on the
rapidly growing discounters
under the DA! brand which
has proved to be successful
and has significant potential
for further growth. The sale
of the supermarkets business
completed in 2017 will help the
Group to concentrate on these
two niches in order to attain
greater efficiency and higher
gains for shareholders.
Improve efficiency
Strengthen our presence
Enhance supply chain
Deliver the best value
PRIORITIES
» Introduce state-of-the-art IT solutions to improve
business processes in sales and marketing and in
logistics and accounting to realise efficiencies across
operations
» Enhance technological platform to support the roll-
out of new formats and online channel
» Improve commercial margins by securing better terms
with suppliers while maintaining attractive product
ranges for customers on store shelves
» Leverage ‘Big Data’ to better understand our
customers and cater to their needs
CHALLENGES
» Provision of sufficient financing
» Employee recruitment and retention
» Supply chain risks
» IT Platform Development
» IT security threats
STAKEHOLDERS
ENGAGED
proposition
» Expand our key compact hypermarket
» Optimise the supply chain for every
» Develop our customer-centric
format, where shopping becomes
product category and SKU, and
approach enhancing the best customer
a truly enjoyable experience
implement a smart, end-to-end supply
value proposition
» Ensure the sustainable growth of our
chain with a high level of centralisation
» Ensure a truly ‘one-stop shop
hypermarket footprint in regions where
» Maintain high shelf availability and
experience’ while offering quality
we have strong brand leadership
optimal inventory levels
products for all wallets
» Develop online shopping with a wide
» Improve efficiency of logistics
» Increase the share of our affordable
range of food and FMCG products
supporting imports and private label
private label products in total sales
with attractive pricing and convenient
products
delivery services
» Provision of sufficient financing
» Changing customer expectations
» Supply chain risks
» Competition risks
» Supply chain risks
» Changes in working capital
» IT Platform Development
» IT security threats
» Employee recruitment and retention
» Introduce new products & services
which ensure the sustainable growth of
our company
» Supply chain risks
» Economic outlook
» Competitive risks
» Changing customer expectations
PRIORITIES
Growth and expansion
» Open more than 30 new stores in 2018 in
Moscow and surrounding regions
CHALLENGES
STAKEHOLDERS
ENGAGED
» Provision of sufficient financing
» Changing customer expectations
» Economic outlook
» Competitive risks
Customers
and partners
Shareholders and
financial community
Strong private labels
Deliver the best value proposition
» We seek to maintain and enhance a strong portfolio of
» We are focused on the creation of a unique value-for-money
» Ensure the best possible quality by carefully selecting our
» Offer the highest quality products through daily deliveries of
concept with an aim to becoming a destination point
fresh produce to all our stores by our own logistics team
private label brands
private label producers
» Increase the share of private labels in the product range
» Maintain an excellent shopping experience with the help of
» Offer the most competitive pricing on the market
our modern design and well-trained personnel
» Improve merchandising to offer the most customer-friendly
» Changing customer expectations
» Supply chain risks
experience
» Changing customer expectations
» Supply chain risks
» Competition risks
Improve efficiency
Strengthen our presence
Enhance supply chain
PRIORITIES
» Introduce state-of-the-art IT solutions to improve
business processes in sales and marketing and in
logistics and accounting to realise efficiencies across
operations
» Enhance technological platform to support the roll-
out of new formats and online channel
» Improve commercial margins by securing better terms
with suppliers while maintaining attractive product
ranges for customers on store shelves
» Leverage ‘Big Data’ to better understand our
customers and cater to their needs
CHALLENGES
» Provision of sufficient financing
» Employee recruitment and retention
» Supply chain risks
» IT Platform Development
» IT security threats
STAKEHOLDERS
ENGAGED
» Expand our key compact hypermarket
format, where shopping becomes
a truly enjoyable experience
» Ensure the sustainable growth of our
hypermarket footprint in regions where
we have strong brand leadership
» Develop online shopping with a wide
range of food and FMCG products
with attractive pricing and convenient
delivery services
» Optimise the supply chain for every
product category and SKU, and
implement a smart, end-to-end supply
chain with a high level of centralisation
» Maintain high shelf availability and
optimal inventory levels
» Improve efficiency of logistics
supporting imports and private label
products
» Provision of sufficient financing
» Changing customer expectations
» Supply chain risks
» Competition risks
» Supply chain risks
» Changes in working capital
» IT Platform Development
» IT security threats
» Employee recruitment and retention
Deliver the best value
proposition
» Develop our customer-centric
approach enhancing the best customer
value proposition
» Ensure a truly ‘one-stop shop
experience’ while offering quality
products for all wallets
» Increase the share of our affordable
private label products in total sales
» Introduce new products & services
which ensure the sustainable growth of
our company
» Supply chain risks
» Changing customer expectations
» Economic outlook
» Competitive risks
19
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
Growth and expansion
PRIORITIES
» Open more than 30 new stores in 2018 in
Moscow and surrounding regions
Strong private labels
» We seek to maintain and enhance a strong portfolio of
private label brands
» Ensure the best possible quality by carefully selecting our
private label producers
» Increase the share of private labels in the product range
» Offer the most competitive pricing on the market
Deliver the best value proposition
» We are focused on the creation of a unique value-for-money
concept with an aim to becoming a destination point
» Offer the highest quality products through daily deliveries of
fresh produce to all our stores by our own logistics team
» Maintain an excellent shopping experience with the help of
our modern design and well-trained personnel
» Improve merchandising to offer the most customer-friendly
CHALLENGES
» Provision of sufficient financing
» Changing customer expectations
» Changing customer expectations
» Supply chain risks
experience
» Changing customer expectations
» Supply chain risks
» Competition risks
» Economic outlook
» Competitive risks
STAKEHOLDERS
ENGAGED
Employees
Government
and loca authorities
Local communities
Media
OPERATIONAL REVIEW
20
20 Operational
Review
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
O’KEY Group of Companies
Operational
Review
2121
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
Annual Report 2017
OPERATIONAL REVIEW
Hypermarkets
O’KEY Group Hypermarkets business is a modern
Western-European style food retail format,
with a passion for quality, best value proposition and
the ambition to deliver a unique customer experience.
2222
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
STRATEGIC
PRIORITIES:
Improve efficiency
Strengthen our presence
Enhance supply chain
Deliver the best value
proposition
Key performance
indicators
Number of stores
Selling space, K m2
Net retail revenue, %
2017
2016
2015
2014
2013
73
2017
74
2016
71
2015
69
60
2014
2013
524
2017
-1.6%
540
2016
4.5%
518
2015
6.9%
503
444
2014
2013
10.0%
19.0%
LFL Net retail revenue, %
LFL Traffic, %
LFL Average ticket, %
2017
-3.40%-3.4%
2017
-5.3%
2017
2.0%
2016
2015
2014
2013
1.6%
1.1%
0.3%
2016
2015
2014
-3.1%
0.3%
2016
1.3%
-0.2%
2015
1.3%
7.4%
2013
-0.6%
2014
2013
3.5%
8.1%
O’KEY Group of Companies
2323
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
Net retail revenue, %
7.3
average store selling space,
K m2
34 K
average product range, SKU
46%
owned stores, 54% leased
87%
hypermarkets share
in sales 2017
Annual Report 2017
OPERATIONAL REVIEW
24
24
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
Operationally, in 2017, we remained dedicated to increasing overall
efficiency and enhancing our customer value proposition through
the introduction of a competitive pricing policy, the implementation
of effective marketing initiatives and assortment structure
improvement.
NEW COMMERCIAL MODEL
At the end of 2017, O’KEY launched a new commercial
model based upon the principle of providing the best
value for money to customers. We have made changes
to our promotion strategy, so that it now includes
smarter planning of promotional campaigns with the
involvement of our key suppliers, as well as a new loyalty
programme for our regular customers. The new strategy
is supported by changes in the placement of promo-
goods in our shops, making better offers closer and more
visible to customers.As part of our ambition to provide
our customers with clear up-to-date information and to
establish a favourable price perception, we significantly
changed the layout of our catalogue by introducing
vivid information about our most attractive offers and
discounts.
RENEWED CONCEPT —
COMPACT HYPERMARKETS
In 2017, the Group continued to develop the compact
hypermarkets format as the centrepiece of the new
generation of O’KEY stores. The compact hypermarket
concept is derived from the ‘Shop-within-a-shop’ zoning
principle and at its core features the integration of a
broader variety of product and service offerings into
larger zones. A prime example would be the inclusion of
a ‘fresh market’ within a hypermarket, which could offer
fresh fish, fresh fruit, delicatessen, meat and bakery areas
and a comfortable café, all under one roof. This approach
accords O’KEY with a distinct competitive advantage in
the food retail market. Compact hypermarkets have been
shown to attract new customers and increase customer
loyalty by meeting a much wider range of shopping
demands in each O’KEY store.
PERFORMANCE
In 2017, the net retail revenue of O’KEY decreased by 1.6%
to RUB 164,055 mln from RUB 166,814 mln in 2016. LFL
net retail revenue fell by 3.2% for the year on the back of
a 5.0% decrease in LFL traffic and a 1.9% increase in LFL
average ticket. Such results were mainly attributable to
falling food inflation in 2017 and growing competitive
pressures in the Russian retail segment. Financial
performance was also negatively affected in the short-
term by the sale of our supermarkets in December 2017 as
part of the strategic overhaul of our business model. We
are confident, however, that the temporary hit to revenues
caused by the sale will be more than offset by the future
growth generated by our revamped strategy.
In 2017, O’KEY opened one compact hypermarket in
Yekaterinburg which will serve as a reference point for us
going forward. The Group also closed two hypermarkets
in Cherepovets and Sterlitamak, in line with the ongoing
programme of store portfolio optimisation. As a result,
the total number of hypermarkets fell from 74 in 2016
to 73 in 2017.
O’KEY Group of Companies
25
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
LOYALTY PROGRAMME
Our loyalty programme is designed to
reward initial customer devotion and provide
our cardholders with a sense of worth,
encouraging them to make even more
purchases at attractive terms.
Originally created as a simple discount
programme, it has significantly evolved
over the 2016-2017 period to now offer the
following benefits to our customers: ongoing
collectable loyalty and weekly promotions,
special coupons promotions for high seasons,
personalised offers for active customers based
on their purchase history.
Our loyalty cardholders can rely on O’KEY to
remain committed to our mantra of running
market-leading promotions and providing
multiple options to save on products, offered
at the best available price. In 2018, we plan to
launch a new points-based loyalty programme.
OPERATIONAL REVIEW
26
COOPERATION WITH LEADING
OFF‑PRICE RETAILER FAMILIA
In 2017, O’KEY signed an agreement to begin a strategic
partnership with Familia, the leading off-price retailer in
Russia. This project is part of O’KEY’s ongoing strategic
initiative to enhance efficiency through the creation of a
compact hypermarket. This is achieved through leasing
selling space to a strategic partner without decreasing the
total number of SKUs in the store.
The contract involves a 5-year lease of 1.5 K m2 – 2.0 K m2
of hypermarket space with the possibility of extension. The
cooperation also involves joint marketing campaigns and
other activities. It is expected to result in customer traffic
growth and additional rent income and consequently will
lead to considerable increases in EBITDA and improve
profitability.
In the second half of 2017, new Familia stores were opened
on the bases of two O’KEY hypermarkets in Yekaterinburg
and in Tyumen. Post pilot openings will be extended to
further O’KEY stores in other locations in 2018. Additionally,
the Group is planning to attract other major retailers to its
hypermarkets in order to generate more traffic and further
selling space optimisation.
PRIVATE LABEL
We have continued to develop our private labels in
order to provide our customers with a wider selection
of high quality products at attractive prices. Private
label products have proved to be an effective means to
increase customer loyalty and enhance our reputation
as the best value for money option in the retail market.
In 2017, we worked to enhance our private label
assortment by introducing the most interesting and
popular products on the market. Overall, we added
720 new SKUs, including 66 re-launched and 654
brand new SKUs. The total share of private label
products within the assortment range reached 6.17%
in 2017 compared to 5.8% in 2016, while the share of
revenue commanded by the main brands ‘That’s What
You Need!’ and ‘O’KEY’ increased from 4.9% to 5.6%.
A key concern of the Group this past year has been in
expanding local products, particularly in fresh food
categories such as milk and milk products, meat and
meat products, fish semi products. By the end of 2017,
the number of local private label products reached 187
SKUs.
Throughout 2017, we improved the promotion policy
of private label brands to now include advertising
campaigns, direct mailing to the customer base and a
dedicated section at the e-commerce website. Private
label products are also featured in regular catalogues
and in dedicated catalogues published twice a year.
Ensuring a stable and high quality of food and non-
food products remains a top priority for O’KEY. We
continued to improve our specially-designed quality
control programme ‘Trademark O’KEY – Customers`
Guarantee’, which includes checking production
facilities as well as testing samples in independent and
accredited laboratories.
O’KEY Group of Companies 874
‘That’s What You Need!’,
SKUs
827
‘O’KEY’, SKUs
1,700+
under both brands, SKUs
77
are seasonal, SKUs
27
6.2%
Share of Private label
brands in SKUs
5.6%
Share of Private label
brands in revenue
This programme has been instrumental in fostering
customer loyalty to our own brands and in raising demand
in the segment.
Ensuring a stable and high quality of food and non-
food products remains a top priority for O’KEY. We
continued to improve our specially-designed quality
control programme ‘Trademark O’KEY – Customers`
Guarantee’, which includes checking production facilities
as well as testing samples in independent and accredited
laboratories. This programme has been instrumental in
fostering customer loyalty to our own brands and in raising
demand in the segment.
Plans
In the coming years, we intend to focus on private
label brands promotion to an even greater degree, with
ambitions of doubling the share of private label brands in
our SKU portfolio, including non-food categories. In 2018,
we are planning to introduce a new exclusive line of O’KEY
products – ‘O’KEY Selection’.
AWARDS:
‘Best private label in non-food in the
economy segment’
‘Best private label in the economy
segment’
‘Responsible approach to private label’
4th International PRIVATE LABEL
AWARDS in 2017 by IPLS
Our own private label products
are 20-30% cheaper than branded
alternatives of the same quality.
Annual Report 2017 OPERATIONAL REVIEW
28
OWN PRODUCTION
O`KEY strives to meet the fast pace of our customer’s lives.
To this end, every day we offer a wide range of freshly
prepared products from our own cookery and bakery. In
2017, we focused on improving and optimising our own
production assortment by introducing healthier products.
Delicious homemade cuisine, prepared with modern
professional equipment, is the hallmark of any O`KEY
hypermarket. Each hypermarket features a complete
cycle of product preparation: ordering and receiving raw
materials, processing, cutting, pickling, cooking and finally
displaying for sale in the retail space.
About two thousand recipes have been developed to
meet the needs of our customers.
Every day we offer discounts and promotions, from
‘Breakfast in O`KEY’ in the morning, to ‘Delicious Hour’ in
the evening.
Each hypermarket has a cafe where our customers can
enjoy a cup of coffee or tea and have a snack.
Culinary and bakery products are produced without
preservatives, resulting in a short shelf life of up to 18
hours. Unsold products are removed from the shelves at
the end of the day as per legislative requirements.
Our cookery and bakery products are included in regularly
published O`KEY catalogues, as well as in a dedicated
section of the e-commerce website.
130
Cookery, SKUs
Cold starters, salads, soups, grilled and
smoked production, meat, poultry, fish
and seafood, desserts and sweet dishes,
a large selection of drinks.
The range also includes a large selection
of semi-finished products.
150
Bakery, SKUs
Wheat and rye-wheat bread, baguettes,
pies, donuts, croissants, muffins, cookies,
cakes and pastries.
O’KEY Group of Companies 29
QUALITY AND SAFETY
Servicing customers with the highest quality produce is
the primary concern of O`KEY.
The Group has developed a quality management system
compliant with the requirements of Russian legislation and
elements of the HACCP1 system. All products undergo
strict control at all stages.
The control procedures include risk assessment (safety
risks and reputation risks), preliminary quality control
measures, periodic assortment monitoring and both
internal and external audit of stores and the supply chain.
We believe that developing a clockwork quality
management system is a key element of our long-term
success as our customers must be fully assured of the
quality of products they buy. That’s why we continued to
enhance our controlling procedures throughout 2017 by
implementing the following measures:
» HACCP system in own production goods;
» private label quality assurance procedures;
» new quality standard of fruits and vegetables.
0
The number of food quality and food
safety incidents in O’KEY and DA!
stores in 2017.
Plans
In 2018, we plan to focus on:
» transition to a new veterinary certification system (new
legal requirements);
» transition from mass production to catering service in
own production;
» HACCP system improvement and further elimination of
food safety risks;
» development of private label quality assurance
processes;
» quality assurance of fruits and vegetables, especially
those directly imported.
1 Hazard Analysis and Critical Control Points (HACCP) — a systematic
preventive approach to food safety from biological, chemical, and
physical hazards in production processes that can cause a finished
product to be unsafe, and designs measurements to reduce these risks
to a safe level.
Annual Report 2017 OPERATIONAL REVIEW
30
30
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
Location and Service Areas of O’KEY Distribution
Centres (DCs)
Warehouses
Regions of service DC Moscow
Regions of service DC St. Petersburg
Regions with logistics without category Fresh
St. Petersburg
Moscow
BUILDING A ROBUST SUPPLY CHAIN
In 2017, we continued to steadily improve our supply chain
and streamline associated business processes, reaching
a 60% centralisation rate by the year’s end.
In line with our corporate strategy, we continued to
further develop our supply chain by focusing on efficiency
and automation. We aim to build a solid warehouse
infrastructure and category management system to
enable us to better serve our customers’ needs in our
regions of operations and to reduce logistics costs to
a more competitive level. For this purpose, O’KEY operates
one federal and two regional distribution centres, located
in Moscow and St. Petersburg, that are responsible for the
timely provision of supplies to our stores and for ensuring
that requested products are always on the shelves.
Our supply chain management approach, combined with
innovative IT-solutions, well-trained and motivated staff,
and a carrier fleet hired from the market’s largest and most
renowned companies enables us deliver fresh product to
our stores within 18 hours from the moment of order.
In 2017, we:
» increased the centralisation rate by 20 p.p.;
» optimised replenishment business processes aimed at
working capital reduction and improvement of on shelf
availability;
» enhanced our demand forecasting capabilities and
implemented the Auto-Order function in stores;
» optimised carrier routes and raised order-picking
and delivery efficiency.
Plans
In 2018, we plan to:
» continue growing the centralisation rate;
» implement IT-systems: Mercury and EGAIS1;
» master the forecasting and replenishment functions.
1 EGAIS – national automated information system for the control of alcohol production and distribution.
O’KEY Group of Companies
60%
Centralisation rate compared
to 40% in 2016
Overall number of DCs
3
1
Moscow
52 K m2
St. Petersburg
Moscow
2
St. Petersburg
21,799 m2 and 7,579 m2
Warehouses
Regions of service DC Moscow
Regions of service DC St. Petersburg
Regions with logistics without category Fresh
IT SOLUTIONS
31
In O’KEY, we believe that introducing efficient and customer-
oriented IT systems and applications is an indispensable part
of remaining competitive in the constantly changing retail
markets.
To maximise our product availability, increase revenues
and eliminate lost sales opportunities, we commenced
an extensive project aimed at modernising our entire
IT infrastructure, using state-of-the-art IT-solutions and
acknowledged software.
In 2017, we:
» launched a successful pilot of a new retail automation
platform based on Microsoft Dynamics AXAPTA 2012;
» launched the first pilot of a self-scanning system in one of
our Moscow stores, which improves customer experience,
increases customer loyalty and stimulates our clients to buy
more per visit.
Plans
We aim to run all our business processes on an integrated IT
platform which will enable us to achieve our strategic business
goals, drive revenues and contribute to further operational
cost optimisation.
In 2018, we will continue to roll out Microsoft Dynamics
AXAPTA 2012 and JDA software to all stores. This will be
supported by the Oracle RPAS platform for our forecasting
and supply chain management processes, as well as for
assortment planning and price optimisation. Alongside these
initiatives, we are working on CRM-solutions which will
contribute to our new loyalty programme launch.
As a result, O’KEY will benefit from optimised shelf design and
layouts in each of our stores. This will better reflect the needs
of our clients and will ensure that the optimal mix of product
categories and brands are found on the shelf and in the best
location in-store.
ERP
Supply
Chain
Category
management
Cash Register
Online Store
Microsoft Dynamics
AXAPTA 2012
Manhattan WMS
Oracle RPAS
JDA Software1
Oracle RPAS
Crystal Service Integration
IBM Web-Sphere
Commerce
1 In the process of implementation.
Annual Report 2017
OPERATIONAL REVIEW
32
ONLINE SHOPPING
O’KEY strengthens its leadership in the food retail
e-commerce market in Russia. The Group was among
the pioneers of food retail e-commerce in Russia and
we believe that this ‘early start’ will give us a distinct
competitive advantage in the future as the borders
between offline and online shopping blur further, creating
a market of omnichannel sales.
In 2017, we saw further evidence that customer appetency
has changed over the years. Customers now not only look
for quality products, but also desire a unique shopping
experience. In order to capitalise on this trend, we
have developed our online services and mobile app to
provide customers with a wider range of opportunities to
enjoy the smart, convenient and memorable shopping
experience the Group offers.
Performance
In 2017, O’KEY maintained its position as the market leader
among online retailers as a result of the Group’s unique
competitive advantages. Our online revenue increased by
108% and reached RUB 1.35 bn, while our online customer
base doubled to 200,000 people.
In 2017, we harmonised our online and offline pricing
policies, ensuring that both offline and online customers
are offered the same prices, discounts and promotions.
This move means O’KEY is now a fully omnichannel
retailer and will help us to provide one of the strongest
online offers in the Russian food retail market.
The growing demand for online purchases has directed
O’KEY to update most of our online shopping tools to
improve operational capacity and capitalise on market
trends. We significantly improved the functionality of our
mobile app, which includes adapted hero-images, promo
catalogues and store location maps among other features.
In 2017, more than 30% of orders were made via the
mobile app.
We expanded our delivery zone in 2017 to now include
Moscow, St. Petersburg and their satellite regions, and also
changed our delivery terms after considering feedback
from our customers. Additionally, O’KEY launched another
pick-up point in the Primorsky District of St. Petersburg,
meaning that by the end of the year we offered five
‘click and collect’ pick-up points in Moscow and five in
St. Petersburg.
In line with our ambition to provide our customers with
multiple delivery and pick-up options, this past year O’KEY
became the first Russian food retailer to launch a unique
drive-through format called ‘O’KEY Auto’. In the six
months since its inception, the format has proven to be
very popular with customers and we intend to extend
the programme to other hypermarkets in the mid-term.
Plans
We expect that online shopping in Russia will continue to
grow at a fast pace in the coming years and as such the
consistent development of our e-commerce business will
remain a strategic priority for the Group.
Moscow
delivery zone
>8,000
tonnes delivered compared
to 3,800 in 2016
1,000
average amount of orders daily
via okeydostavka.ru
St. Petersburg
delivery zone
O’KEY Group of Companies OUR MOBILE APP ALLOWS OUR CUSTOMERS TO:
purchase goods
pay online
use facet search and filters
view order history
use easy templates
view offline catalogues
share basket between users
find nearest store
view promotions
33
In 2017, GfK ranked O’KEY the 2nd
best performing online store in
the food retail segment.
Annual Report 2017 OPERATIONAL REVIEW
OPERATIONAL REVIEW
34
34
s Discounters
i
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
DA! discounters are a unique store format in Russia, where
the lowest prices meet quality assortment that covers
the daily needs of every customer. Convenient locations,
excellent customer service and exclusive private label
products make DA! stores the best choice for smart
shoppers looking for the best value for their money.
STRATEGIC
PRIORITIES:
Growth and expansion
Strong private labels
The best value proposition
Number of stores
Selling space, K m2
Net retail revenue, %
2017
2016
67
54
2017
2016
46.2
2017
81.8%
37.3
2016
>100%
LFL Net retail revenue, %
LFL Average ticket, %
LFL Traffic, %
2017
2016
52.0%
65.5%
2017
2016
12.7%
2017
2016
20.4%
34.8%
37.4%
O’KEY Group of Companies
3535
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
Net retail revenue, %
700
average store selling
space, m2
6%
discounters share
in sales 2017
26%
owned stores, 74% leased
2,250
product range, SKU
Annual Report 2017
OPERATIONAL REVIEW
36
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
Strong private
labels
>65% in SKUs
Supply chain
Own distribution centre –
100% centralisation
Our staff
More than 1,700 employees
Well trained personnel
Positive working environment
Excellent customer service
Limited product range
Low prices
High turnover per SKU
Modern and
attractive store
design
DA! DISCOUNTERS
VALUE
OUR CUSTOMERS
37
PERFORMANCE
In 2017, the net retail revenue of DA! discounters increased
by 81.5% to RUB 10,282 mln compared to RUB 5,666 mln
in 2016. Average traffic per store per day increased by
30.5%, while average ticket rose by 11.7% and reached
450 RUB by the end of the year.
These strong results were achieved thanks to the
significant effort put into diversifying and enhancing
our value proposition to customers by improving the
assortment mix and overall customer experience. Of note,
in 2017, we:
» adapted our product range to the needs of our
customers, increasing it to around 2,250 SKU;
» introduced over 180 SKU of private labels;
» maintained a consistent price-level, while our key
competitors raised their prices;
» conducted extensive staff-training to increase the
quality of customer service.
In 2017, we opened 13 new stores in Moscow and the
Moscow Region, therefore increasing the total number of
our discounters to 67 and total selling space to 46.2 K m2.
OUR PEOPLE
We truly believe that we have an inspired and dedicated
team of employees who represent some of the best in
their field. Due to our expansion in 2017, the number of
employees increased by more than 50% compared to
the previous year, as of 31 December 2017, DA! employed
1,772 people. We provide equal opportunities for both
male and female employees, almost 60% of all employees
are women. We have a very age-diverse talent pool and
provide development and career opportunities to all of
our employees.
SUPPLY CHAIN
DA! Discounters operate under the principle of ‘Every day
low price’, while maintaining an uncompromisingly high
quality of goods. One of the key factors supporting this
principle is our supply chain.
All our stores are supplied from our own distribution
centre, with a storage capacity of over 55 K m2 located
60 km south of Moscow. Short shelf-life and ultra-fresh
products are delivered to stores each morning by the time
of opening. To ensure maximum freshness, they are not
stored in distribution centre, but instead are shipped to
stores the very day they arrive to the docks.
Due to the expansion of the sales network and increase
of sales per store, in 2017 we significantly optimised the
operating procedures of the distribution centre, which has
allowed us to process two times more volume in less time
when compared to 2016.
PRIVATE LABELS
AND OWN PRODUCTION
We constantly seek opportunities to optimise the
assortment of our stores, picking up trends and fulfilling
the needs and expectation of our customers. We put
considerable emphasis on strengthening our private
label products, many of which are made by our suppliers
exclusively for DA!.
In 2017, we introduced 180 new private labels, which
increased the total number of private label SKUs on offer
to 900. Our main goal is to further develop and introduce
new private label products with an appearance and quality
comparable to the most popular brands.
PLANS
In 2018, we plan to open up to 30 new stores. The higher
number of operating stores and bigger volumes will allow
us to negotiate better prices from suppliers, which in turn
should increase commercial margins.
As for the product range, we plan to keep the current
number of SKUs at the same level while strengthening our
private label offering and further developing our supplier
base to ensure that our customers are offered the best
quality products.
Annual Report 2017 MANAGEMENT DISCUSSION AND ANALYSISREVIEW
38
Management Discussion
and Analysis
GROUP PROFIT AND LOSSES
RUB mln
Total Group revenue
Gross profit
Gross profit margin
SG&A
GS&A as % of revenue
Group EBITDA
Group EBITDA margin
Net profit/(loss)
REVENUE
2017
177,455
40,444
22.8%
(36,189)
20.4%
9,335
5.3%
3,167
2016
175,471
40,209
22.9%
(35,764)
20.4%
9,253
5.3%
(138)
∆ YoY
1.1%
0.6%
(10 bps)
1.2%
0 bps
1.0%
0 bps
>100%
In 2017, total Group revenue increased by 1.1% YoY to RUB 177,455 mln while LFL revenue decreased by 1.4% YoY. The LFL
revenue dynamics is largely attributable to a 2.2% YoY decrease in LFL customer traffic driven by intensifying competition,
and an increase in LFL average ticket by 0.8% YoY affected by falling food inflation. While consumer sentiment has been
largely on track to recovery the strong selling space growth ahead of food retail sales continued to put pressure on the
performance of more mature stores.
By the end of the reporting period, total selling space decreased by 7.2% to 577,804 m2. O’KEY selling space decreased by
9.3% to 531,589 m2 and selling space of DA! increased by 25.3% to 46,215 m2.
COST OF GOODS SOLD AND GROSS PROFIT
The cost of goods sold as a percentage of revenue increased by 10 bps in 2017 to RUB 137,010 mln. The table below provides
the breakdown of cost of goods sold for 2017 and 2016:
RUB mln
Total revenue
Cost of goods sold
Cost of trading stock (less supplier bonuses)
Inventory shrinkage
Logistic cost
Labelling and packaging costs
Gross profit
2017
% of revenue
2016
% of revenue
∆ YoY
177,455
(137,010)
(129,262)
(3,086)
(3,834)
(828)
40,444
77.2%
72.8%
1.7%
2.2%
0.5%
22.8%
175,471
(135,261)
(128,800)
(2,867)
(2,771)
(824)
40,209
100.0%
77.1%
73.4%
1.6%
1.6%
0.5%
22.9%
10 bps
(60 bps)
10 bps
60 bps
0 bps
(10 bps)
In 2017, gross profit increased 0.6% YoY to RUB 40,444 mln while the gross margin remained virtually unchanged YoY at
22.8%. These results were, for the most part, influenced by more favourable purchasing conditions and better customer
value proposition across all store formats. The ongoing work on logistics centralisation together with continued
expansion of the discounters format during the year, resulted in a logistic cost increase of 60 bps, as percentage of
revenue, to RUB 3,834 mln. Improvements are expected in the net logistics costs by the end of 2018, as the centralisation
of logistics progresses and its processes become more efficient. Shrinkage costs as a percentage of revenue increased by
10 bps YoY partially affected by one-off write offs.
O’KEY Group of Companies
SELLING, GENERAL AND ADMINISTRATIVE COSTS
39
The general, selling and administrative expenses as a percentage of revenue remained flat YoY, reflecting the Group’s
ongoing work on increasing efficiency across all business processes. The table below provides the general, selling and
administrative expenses breakdown for 2017 and 2016:
RUB mln
Personnel costs
Operating leases
Depreciation and amortisation
Communication and utilities
Advertising and marketing
Repairs and maintenance
Security expense
Insurance and bank commissions
Operating taxes
Legal and professional expenses
Materials and supplies
Other costs
Total SG&A
PERSONNEL COSTS
2017
% of revenue
2016
% of revenue
(15,619)
(5,758)
(4,613)
(3,525)
(2,116)
(1,254)
(869)
(819)
(730)
(520)
(329)
(36)
8.8%
3.2%
2.6%
2.0%
1.2%
0.7%
0.5%
0.5%
0.4%
0.3%
0.2%
0.0%
(16,185)
(5,344)
(4,550)
(3,486)
(1,795)
(1,183)
(825)
(737)
(713)
(603)
(302)
(41)
9.2%
3.0%
2.6%
2.0%
1.0%
0.7%
0.5%
0.4%
0.4%
0.3%
0.2%
0.0%
(36,189)
20.4%
(35,764)
20.4%
∆ YoY
(40 bps)
20 bps
0 bps
0 bps
20 bps
0 bps
0 bps
0 bps
0 bps
0 bps
0 bps
0 bps
0 bps
In 2017, personnel costs as a percentage of revenue decreased by 40 bps to 8.8% or by RUB 566 mln YoY. The realised cost
savings were, for the most part, attributable to ongoing business processes efficiency increase on both store and head
office levels. In 2018, the Group will continue to focus on enhancing the effectiveness of business processes across all store
formats.
OPERATING LEASES
Operating lease costs as a percentage of revenue increased by 20 bps YoY to 3.2%. This was primarily attributable to
the rollout of discounters in the second half of the year in line with previously announced plans and a revision of lease
agreements of two hypermarkets during the year. The operating lease expenses as percentage of revenue are expected to
decrease as the discounters continue to gain momentum.
COMMUNICATION AND UTILITIES COSTS
Communication and utilities expenses as a percentage of revenue remained unchanged at 2.0%. The Company aims to
continue the work on further optimization of the respective costs and efficiency improvement.
ADVERTISING AND MARKETING EXPENSES
Advertising and marketing expenses as a percentage of revenue increased by 20 bps YoY to 1.2%, while in absolute terms
the growth amounted to 17.9% YoY. This YoY increase was primarily driven by continuous work on our customer value
proposition and enhancing and implementing a number of marketing initiatives aimed at aligning of our formats price
perception with the ‘best value for money’ concept.
Annual Report 2017 MANAGEMENT DISCUSSION AND ANALYSISREVIEW
40
EBITDA
RUB mln
Revenue
EBITDA
EBITDA margin
O’KEY
2017
2016
167,062
169,696
11,359
6.8%
11,845
7.0%
Change,
YoY
(1.6%)
(4.1%)
(20 bps)
DA!
2017
10,393
(2,024)
-
2016
5,775
(2,592)
-
∆
YoY
80.0%
(21.9%)
-
Group EBITDA increased 1.0% YoY to RUB 9,335 mln with EBITDA margin remaining flat YoY at 5.3%.
EBITDA generated by O’KEY fell 4.1% YoY to RUB 11,359 mln with the margin decreasing by 20 bps to 6.8% primarily on the
back of growing competitive pressure and higher logistics costs on the back of aggressive centralization.
EBITDA generated by DA! improved from negative RUB 2,592 mln (44.9% of sales) in 2016 to negative RUB 2,024 mln (19.5%
of sales) in 2017 driven by new store openings and higher LFL sales.
DEPRECIATION AND AMORTISATION
Depreciation and amortisation as a percentage of revenue remained flat YoY at 2.6%. In absolute terms, the 1.4% growth
YoY was in line with revenue and for the most part triggered by the replacement of old in-store equipment and new store
openings.
NET FINANCE COSTS
Whilst net finance costs as percentage of revenue remained unchanged YoY, in absolute terms the increase amounted to
4.6% YoY due to decrease in finance income. The Group’s average loan portfolio stayed virtually unchanged YoY.
NET PROFIT
In 2017, net profit amounted to RUB 3,167 mln versus a net loss of RUB 138 mln a year ago. This trend was for the most part
underpinned by the gain on the sale of the supermarket business in December 2017. .
CASH FLOW AND WORKING CAPITAL
RUB mln
Net cash (used in)/from operating activities
Net cash used in investing activities
Net cash used in financing activities
Net decrease in cash and cash equivalents
Effect of exchange rate on cash and cash equivalents
2017
4,874
(3,365)
(5,187)
(3,678)
(35)
2016
11,673
(5,413)
(4,529)
1,730
(35)
O’KEY Group of Companies NET CASH (USED IN)/FROM OPERATING ACTIVITIES
41
As of 31 December 2017, the Group’s working capital, defined as current assets (excluding cash and cash equivalents and
short-term investments) less current liabilities (excluding short-term loans), was a negative RUB 4,633 mln compared to
negative RUB 12,734 mln as of 31 December 2016. The working capital turnover decrease was primarily attributable to
the amendments in the Trade Law and temporary effect from reorganization of the logistics processes which accompany
the centralization. As a result, notwithstanding the growth of cash receipts from customers by 1.4% YoY, net cash from
operating activities during the reported period amounted to RUB 4,874 mln, while in 2016 the Group reported operating
cash of RUB 11,673 mln.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities declined from RUB 5,413 mln in 2016 to RUB 3,365 mln in 2017 in line with the Group’s
conservative investment strategy. The consideration received from the sale of supermarket business will be reflected in the
Group’s consolidated cash flows for 1H 2018.
NET CASH USED IN FINANCING ACTIVITIES
Net cash used in financing activities in 2017 amounted to RUB 5,187 mln. Over the reported period, the Group
attracted RUB 7,686 mln of financing through the placement of exchange-traded bonds and made repayments
totaling RUB 7,663 mln. In January 2017, the Group distributed a dividend in the amount of RUB 1,466 mln.
DEBT
The Group considers the Net Debt/EBITDA ratio as the principal means for evaluating the impact of the Group’s
borrowings on its operations. As of 31 December 2017, Net Debt/EBITDA ratio was 3.1x compared to 2.7x at
31 December 2016. We maintain a conservative approach to borrowing and expect Net Debt/EBITDA to be below
3.0x by the end of 2018.
RUB mln
Total debt
Short-term debt1
Long-term debt
Cash&cash equivalents
Net Debt
Net debt/EBITDA
As of
31 December
2017
As of
31 December
2016
As of
31 December
2015
36,341
11,662
24,679
7,750
28,591
3.1x
36,295
4,622
31,673
11,463
24,832
2.7x
35,558
12,000
23,558
9,768
25,790
2.6x
1 Short-term debt includes interest accrued on loans and borrowings.
Annual Report 2017 CORPORATE SOCIAL RESPONSIBILITY
42 Corporate Social
Responsibility
Customers and partners
Shareholders and
financial community
Employees
Government and
local authorities
Local communities
Media
WHY WE ENGAGE
The reliable and transparent relationship
with our customers and partners forms
a vital element of our strategy and drives
the Group’s performance.
As one of the leading Russian retailers,
O’KEY aims to sustain this mutually
beneficial partnership to ensure progress
and promote development in all spheres.
KEY FOCUS AREAS
CUSTOMERS
» The variety and quality of provided
goods
» Guarantee of the best price
» High level of provided services
PARTNERS
» Reliability of supplies
» Mandatory compliance with contract
provisions and legal requirements
» Rigorous due diligence of all partners to
establish their integrity and solvency
WHAT WE ARE DOING
» Customer surveys and focus groups
» Feedback on call centre
» Meetings with (potential) suppliers and
business partners
» Participation in industry conferences
» Conclusion of supply contracts for
products and monitoring performance
of requirements for counterparties
As a publicly listed company, we need
to provide open, timely and transparent
information to help our investors make
informed decisions about our financial
and non-financial performance.
» Corporate governance
» Financial and non-financial results
» Strategy and KPIs
» Risks
Every aspect of our strategy is based on
the commitment of our people. Their
knowledge, their willingness to work
and their satisfaction are the keys to the
Group’s successful operations. We put an
emphasis on creating the conditions for
professional and career growth for our
people as it strengthens their loyalty to the
business.
» Principles of social partnership
» Mutual respect and trust that underpin
HR Policy
» Financial and non-financial incentives
» Learning and development
opportunities
» Health and safety standards
» Presentations and conference calls
» Implementation of updated HR Policy
» Information disclosure and reporting
» Meetings with representatives of local
» Press releases on material issues and
between management and the financial
community
» Website publication of relevant GM/
EGM documents
» Meetings between management and
the financial community, including
industry conferences
» Investor and analyst site visits
» General meetings of shareholders
» Press releases on material issues and
key Group events
and Health and Safety Policy
» Developing a system of internal
communication and feedback
» Regular meetings between
management and employees
» Ensuring safety in the workplace
» Implementation of social programmes
and financial incentive programmes
» Employee satisfaction and employee
engagement surveys
The Group strictly follows industry
The development of the Group needs to
The Group needs accurate and timely
standards and complies with all laws and
be supported by the local communities
coverage by the various media channels
regulations.
wherever it operates. A better quality of
when disclosing its financial and operational
O’KEY aims to establish and maintain
life for our people and local communities,
results, key external and internal events,
stable and constructive relations with
established through our social and cultural
community activities and participation in
national and local government authorities
projects, contributes to regional social and
industry conferences, etc. The adequate
based on the principles of accountability,
economic development and ensures the
perception of O’KEY and its strategy by all
good faith and mutual benefit.
sustainability of our operations, helping us
stakeholders is mutually beneficial for the
fulfil our commitments as an industry leader.
Group and its target audiences.
» Reporting to regulators
» Environmental safety
» Accurate media coverage of the
» Social infrastructure development and
Group’s strategic messages, corporate
» Implementing local community
modernisation
events and news
development projects and social
» Supporting cultural events
» Getting feedback from society and
» Taxation
projects
» Supporting vulnerable population
media
» Maintaining the relationship with
stakeholders at all levels
» Maintaining a dialogue with
groups
government authorities on current
legislative and regulatory issues
» Corporate philanthropy
» Dialogue with government authorities
communities
key events
on legislative and regulatory issues
» Economic, environmental and social
» Interviews with management
» Participation in workshops and expert
initiatives
» Press tours and press conferences
panels
» Implementation of joint projects
» Local community development
» Publications in local media
» Public hearings
» Maintaining contact with NGOs
O’KEY Group of Companies O’KEY endeavours to be a significant contributor to the local
communities in which we operate, as well as to the Russian
economy and society in general. Our stores operate in more than
30 cities and towns across Russia, from large metropolitan areas
to smaller towns with under a thousand inhabitants. We employ
thousands of people, a responsibility which we take very seriously,
as we acknowledge that they and their families depend on us for
their livelihoods.
43
Customers and partners
Shareholders and
financial community
Employees
WHY WE ENGAGE
The reliable and transparent relationship
As a publicly listed company, we need
Every aspect of our strategy is based on
with our customers and partners forms
to provide open, timely and transparent
the commitment of our people. Their
a vital element of our strategy and drives
information to help our investors make
knowledge, their willingness to work
the Group’s performance.
informed decisions about our financial
and their satisfaction are the keys to the
As one of the leading Russian retailers,
and non-financial performance.
Group’s successful operations. We put an
emphasis on creating the conditions for
professional and career growth for our
people as it strengthens their loyalty to the
business.
» The variety and quality of provided
» Financial and non-financial results
» Mutual respect and trust that underpin
» Corporate governance
» Principles of social partnership
» Strategy and KPIs
» Risks
HR Policy
» Financial and non-financial incentives
» Learning and development
opportunities
» Health and safety standards
O’KEY aims to sustain this mutually
beneficial partnership to ensure progress
and promote development in all spheres.
KEY FOCUS AREAS
CUSTOMERS
goods
» Guarantee of the best price
» High level of provided services
PARTNERS
» Reliability of supplies
» Mandatory compliance with contract
provisions and legal requirements
» Rigorous due diligence of all partners to
establish their integrity and solvency
WHAT WE ARE DOING
» Customer surveys and focus groups
» Presentations and conference calls
» Implementation of updated HR Policy
» Feedback on call centre
between management and the financial
and Health and Safety Policy
» Meetings with (potential) suppliers and
community
» Developing a system of internal
business partners
» Website publication of relevant GM/
communication and feedback
» Participation in industry conferences
EGM documents
» Regular meetings between
» Conclusion of supply contracts for
» Meetings between management and
management and employees
products and monitoring performance
the financial community, including
» Ensuring safety in the workplace
of requirements for counterparties
industry conferences
» Investor and analyst site visits
» Implementation of social programmes
and financial incentive programmes
» General meetings of shareholders
» Employee satisfaction and employee
» Press releases on material issues and
engagement surveys
key Group events
Government and
local authorities
Local communities
Media
The Group strictly follows industry
standards and complies with all laws and
regulations.
O’KEY aims to establish and maintain
stable and constructive relations with
national and local government authorities
based on the principles of accountability,
good faith and mutual benefit.
The development of the Group needs to
be supported by the local communities
wherever it operates. A better quality of
life for our people and local communities,
established through our social and cultural
projects, contributes to regional social and
economic development and ensures the
sustainability of our operations, helping us
fulfil our commitments as an industry leader.
The Group needs accurate and timely
coverage by the various media channels
when disclosing its financial and operational
results, key external and internal events,
community activities and participation in
industry conferences, etc. The adequate
perception of O’KEY and its strategy by all
stakeholders is mutually beneficial for the
Group and its target audiences.
» Reporting to regulators
» Taxation
» Implementing local community
development projects and social
projects
» Maintaining a dialogue with
government authorities on current
legislative and regulatory issues
» Corporate philanthropy
» Environmental safety
» Social infrastructure development and
modernisation
» Supporting cultural events
» Supporting vulnerable population
groups
» Accurate media coverage of the
Group’s strategic messages, corporate
events and news
» Getting feedback from society and
media
» Maintaining the relationship with
stakeholders at all levels
» Information disclosure and reporting
» Dialogue with government authorities
on legislative and regulatory issues
» Participation in workshops and expert
panels
» Implementation of joint projects
» Local community development
» Meetings with representatives of local
» Press releases on material issues and
communities
key events
» Economic, environmental and social
initiatives
» Publications in local media
» Public hearings
» Maintaining contact with NGOs
» Interviews with management
» Press tours and press conferences
Annual Report 2017 CORPORATE SOCIAL RESPONSIBILITY
44 Our Employees1
The HR policy of O’KEY is focused on the recruitment and
retention of qualified and promising employees. The basic
priorities of the Company are centred around increasing the
productivity of our personnel and providing customers with the
highest level of service. We strive to create an effective working
environment for our employees and ensure they have the
opportunity to develop both personally and professionally.
The mission of our
HR strategy is to
create an atmosphere
conducive
to improving
competitiveness
through the efficient
management of
human capital.
As part of our HR strategy we are concerned with the following objectives:
» building a strong brand of O’KEY as an employer in Russia;
» creating a working culture of involvement and high-performance;
» formation of an efficient organisational structure;
» formation of an efficient management team;
» recruitment and retention of talent;
» system management of turnover.
In 2018, we will continue to work on strengthening O’KEY’s brand as we develop
the corporate culture and projects aimed at improving the Company’s efficiency.
OUR TEAM IN NUMBERS
CEO announced a strategic focus on developing the Group’s efficiency through
continuous improvement and modernisation at the corporate conference
under the slogan ‘The Company’s result is my responsibility’. In 2017, a new
organisational structure was developed for the stores and the headoffice, based
on the functional diagnostics. The new structure excludes duplicate functions,
which decreased the cost of the labour compensation fund, increased the
efficiency of processes and brought clarity to the responsibilities of employees.
In 2017, staff numbers were optimised as part of a deal that sold the Group’s
supermarket business. A significant number of employees have since been
employed in the stores of the buying company, with the remainder transferred
to other O’KEY divisions. Owing to the efficient efforts aimed at optimising
the quantity of staff and an accomplished deal, the total number of personnel
decreased by 12.5% year-on-year and amounted to around 21, 000 persons.
1 Information in this section is provided for O’KEY company only and does not include the business of
discounters.
O’KEY Group of Companies 45
Breakdown of personnel by gender identity, %
Breakdown of personnel by age, %
28%
72%
Men
Women
9%
33%
29%
22%
18-25 years
26-35 years
36-45 years
46-55 years
7%
56+ years
CORPORATE CULTURE
In 2017, we continued to work
on the introduction of corporate
values into the everyday work of
our employees with the aim of
establishing an atmosphere of
professionalism and performance.
In 2017, O’KEY
presented a new
value – ‘Innovativeness’.
Throughout the year O’KEY has
carried out two leadership forums
devoted to summarising the results
for the year and updating strategic
objectives. The updated strategy of
the Group as well as a film about
the Group and its history have been
presented at the forums.
O u t s t a nding results
I
m
p
e
c
c
a
b
l
e
s
e
r
v
i
c
e
OUR
VALUES
ess
n
e
tiv
a
v
o
n
n
I
E
ff
e
ctiv
e team
o f e ssio nalism
A t m o s p here
r
o f p
Annual Report 2017
CORPORATE SOCIAL RESPONSIBILITY
46
CORPORATE PERSONNEL TRAINING
AND DEVELOPMENT SYSTEM
O’KEY remains committed to the personal and
professional growth of its employees. O’KEY continues
its development as a self-training organisation. In 2017,
we continued to develop distance learning facilities
for employees and increased the number of ‘face-to-
face’ training courses from 16 to 38. We also launched
a corporate online and offline library and an ambitious
educational project – ‘O’KEY knowledge marathon’.
TRAINING COURSES TOGETHER
WITH SUPPLIERS
In 2016, we conducted courses together with
large suppliers on product-related training of store
employees to increase staff knowledge of brands and
service quality. Training courses have been developed
and carried out at O’KEY on brands such as: Johnson’s
baby, Libero, Zewa, Efes, Nestle, Heinz, Philip Morris.
O’KEY’S ACADEMY
CORPORATE LIBRARY
In 2017, 38 new courses were developed and launched,
28 of which were established by the internal staff.
>50
courses are available for distance
learning at O’KEY Academy
46,332
employees, man/courses were trained at
O’KEY Academy in 2017
‘O’KEY KNOWLEDGE MARATHON’
The project is aimed at strengthening our corporate
values and corresponds to a strategic focus on efficiency.
We have organised masterclasses as part of the project
dedicated to developing leadership, efficiency, lean
production, management of human resources, reviews
and trends of retail services market. Top managers at
O’KEY participated in training for the first time as part of
the project on such topics as information technologies,
finance, quality and sales. Conferences and business
games for enhancing teamwork alongside brainstorming
events have also been organised.
The corporate library exists in three formats:
» generally accessible online library on the basis of
a distance learning system – 25 books;
» online library – more than 1,000 books;
» bookcrossing project in the offices of Moscow
and St. Petersburg.
>100
different events have been organised
within one month in the Group’s
operating cities
800
unique employees have passed training
within the project’s framework
O’KEY Group of Companies 47
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
PERSONNEL RETENTION
AND MOTIVATION
CORPORATE WHISTLEBLOWING
POLICY
In order to create the atmosphere of transparency and
confidence the Group strives for, O’KEY has enacted a
policy to report infringements of our best practices, which
cover the issues of violating ethics, labour legislation,
issues of interaction between employees, between
employees and management. There are several channels
to report infringements at O’KEY including a call centre,
mandatory management visiting hours and morning
meetings.
100%
appeals have been processed with
a feedback provided thereto
322
appeals were received in 2017
O’KEY efficiently utilises market-leading of tangible
and intangible incentives to motivate employees. A key
performance indicator system is in effect at O’KEY which
includes both individual and corporate goals. Bonuses
are performance related and equate to a certain share
of salary.
In order to continue to be an attractive employer for our
employees, we carried out a labour market investigation in
2017 and reviewed the salaries for a number of positions
on the basis of the acquired analysis.
COMPENSATIONS AND BENEFITS
O’KEY ensures the necessary support is given to its
employees in full conformity with legislative requirements.
O’KEY also runs additional programmes aimed at
establishing a comfortable working environment for our
employees.
In particular, O’KEY provides its employees with the
following benefits:
» long-term marginal cost under conditions of co-
financing to the amount of 80-90%;
» payment for lunches;
» gift cards for the O’KEY network and gifts to children on
holidays;
» tangible incentives to employees caught in difficult life
situations;
» payment of membership in fitness clubs paid in
installments.
CORPORATE SOCIAL RESPONSIBILITY
48
Health
and Safety
Ethics and
Compliance
Ensuring the health and safety of
our employees remains one of the
top priorities for O`KEY. We strive
to provide our employees with safe
working conditions and our customers
with a safe shopping environment.
O’KEY Group adheres to high standards
of compliance with internal discipline,
legislative and regulatory requirements,
ethical and socio-legal rules and principles.
The Group adheres to the principle of zero
tolerance for any kind of discrimination.
WHAT WE DO:
Monitoring workplace conditions
Monitoring employee health
Training employees
As part of our Health and Safety monitoring process, we
conduct a regular audit of our stores, distribution centres
and workplaces to ensure they are in full compliance
with Russian legislation governing workplace safety. In
2017, specialists from the Labour Protection Department
conducted 1,347 comprehensive inspections of our
premises with regards to labour protection and fire
safety in order to reduce the risk of penalties from the
supervisory authorities.
Our employees are trained in work
safety in accordance with the highest
professional standards. In 2017, 3,059
members of our staff were trained to
these professionally recognised levels.
In line with best international practices, O`KEY has
implemented integrated systems for the regular tracking
of working conditions and for logging all accidents and
injuries. We have a systematic approach for investigating
any accidents involving our employees or customers.
The number of work-related injuries in 2017 continued
to fall compared to the prior year. The total number of
accidents amounted to 50, with all classified as light in
their severity.
>6,500
workplaces have passed special
assessment of working conditions
during 2015-2017
The Group proceeds from the fact that its employees
build their business relations on the terms of partnership,
mutual respect, common goals and objectives. In any
situations and circumstances, the activities and behaviour
of employees of the Group must comply with high
professional and ethical standards, generally accepted
moral values.
Adherence to ethical norms and principles
helps the Group avoid unjustified risks,
maintain long-term economic growth,
strengthens the team and the market
positions.
The Group has introduced and successfully operates
internal regulatory documents, including:
Supplier selection Policy and Policy of choosing
a counterparty
Policy of interaction with state bodies
Anticorruption policy
The Group has developed training programmes for
employees on compliance with legislation on consumer
protection, interaction with government agencies and
others. These programmes are regularly updated, and
trainings for employees are conducted.
In 2018, the Group will continue to work on the
organisation and strengthening of the Compliance
function, in particular through the creation of a unified
system and a unified policy of Compliance, the
organisation of appropriate training and controlling
procedures.
O’KEY Group of Companies
Preventing
Corruption
49
O’KEY Group has a zero tolerance
policy towards corruption. We have
put in place clear policies to prevent
corruption in our business as well as
to detect and avoid potential conflicts
of interest.
We keep close monitoring of O’KEY’s commercial
activity internally as well related to our suppliers and
partners and any deviations from standard operating
procedures and Anti-corruption policy. Any suspicious
behaviour is investigated according to our rules and
policies and relevant measures are taken.
Any of our potential suppliers and
service providers are scanned prior to
getting a contract. We verify accuracy
(transparency) of their financial reporting
and that there is no affiliation to our other
suppliers or our employees. We expect our
suppliers to sign a consent confirming to
follow our anti-corruption policy.
Training of our employees remains a priority for us. There
are dedicated briefings and explanations given to most
exposed departments of the business. Companywide
communication is organised through leadership forums
held twice a year. Additional briefings are held on store
level by Risk and Compliance group leaders. All O’KEY
Group employees have voluntarily signed the consent to
follow Group’s anti-corruption policy.
We encourage our employees to follow
Group’s policies and business ethics
supported by our values.
We maintain a confidential whistleblower e-mail address
for reporting potential conflicts to our internal audit
and security departments. Also, any person may use
the call centre to complain. Any information is promptly
investigated by the anti-corruption team of the Risk
Department.
O’KEY Group systematically monitors regulatory
risks in the following areas:
antitrust regulation
legislation on consumer protection
labour law
alcohol and tobacco products trading
advertising, intellectual property and
information protection
licensing and sanitary regulation
judicial work and execution of judicial acts
environmental regulation
corporate legislation and legislation on the
securities market, disclosure of information
Annual Report 2017 CORPORATE SOCIAL RESPONSIBILITY
50 Our Communities
O’KEY has developed an integrated programme of both charity and social
investment designed to align the Group’s objectives with addressing the
broader social problems of the local communities in which we operate. This
approach involves working together with local authorities, business partners,
non-governmental organisations and our customers for the benefit of local
communities as a whole.
FOOD AID
In partnership with the Charity Foundation Place under
the Sun in December 2017 O’KEY held an annual charity
project ‘Kind Purchase’ to collect food and basic items
on behalf of low-income families and families raising
children with disabilities. Food aid was provided to more
than 1,000 families in St. Petersburg before the New
Year.
TREATMENT SUPPORT
In 2017, O’KEY, in partnership with Rusfond, held
two large-scale charitable events, ‘Buy a toy – save
a child’s life’ in February and ‘Kind November: helping
children together’ in November. As a result of generous
donations from our customers, we collected more than
RUB 12.5 mln for those in need. The funds received from
the sale of private label toys and goods were used for
several operations, postoperative treatment, purchase
of orthopedic suits, wheelchairs and even to purchase
expensive medication for the vulnerable. We helped 24
critically ill children with various malformations from
Irkutsk, Krasnodar, Murmansk, Orenburg, Stavropol, Ufa,
St. Petersburg, Volgograd, Voronezh, Leningrad, Rostov
and Tyumen regions.
Since April 2016, O’KEY has been a loyal partner of the
St. Petersburg charitable fund AdVita, a foundation
dedicated to helping children and adults suffering from
cancer. We organised a variety of campaigns in our St.
Petersburg stores throughout 2017 to raise funds for
AdVita and placed donation boxes next to check-outs
for our customers to be able to help those in need.
Since the beginning of the project, the generosity of our
customers has helped us raise more than RUB 5.5 mln
to put towards the treatment costs of over 20 children
and adults with cancer.
In line with our mission, we place particular emphasis on
targeted assistance and support programmes helping
orphans and children lacking parental care, as well as
large families with five or more children.
PRIORITIES OF CHARITY
PROGRAMMES
holistic support of large families designed to improve
their financial position
support for gifted children lacking parental care
support of educational programmes for children
in orphanages
MAJOR CHARITIES‑PARTNERS IN 2017
Rusfond
Place under the Sun
Festival ‘Step towards!’
AdVita
O’KEY Group of Companies 51
DEVELOPMENT OF CHILDREN’S
CREATIVITY
For several years O’KEY has been the general partner
of the St. Petersburg international creative festival for
children and youth with disabilities, ‘Step towards!’. In
May 2017, the festival was held for the tenth time and
brought together 500 participants from 52 regions of
Russia. The ‘Step towards!’ festival helped the children to
work through their social anxieties and many secured a
work placement among the creative professions.
In May 2017, O’KEY supported the all-
Russian charity event ‘Red Carnation’,
hosted by the Memory of Generations
fund that aims to provide veterans with
high-tech medical care.
SUPPORTING VULNERABLE GROUPS
We consider it our responsibility, as one of Russia’s
leading food retailers, to ensure, to the best of our
ability, that vulnerable population groups have access to
basic food products at affordable prices. For five years
we have been offering holders of state social cards an
additional 3% discount at our stores in Moscow and the
Moscow region, the Krasnoyarsk region and Murmansk.
The discount does not apply to alcohol and tobacco
products.
ENVIRONMENTAL RESPOSIBILITY
We believe that having a responsible approach to
the environment is an integral component of being
successful in the market in the long term. Running
our business in strict compliance with Russian
environmental legislation is a key priority for O’KEY.
Further to this we regularly implement our own
initiatives directed to increasing our eco-friendliness:
we equip our stores with modern
recuperators and energy-efficient lights
to reduce our total energy consumption
we conduct separate waste collection
in all our stores to reduce the amount
of waste to be buried at city landfills
we perform quarterly monitoring of
atmosphere and noise pollution in the
buffer zone to make sure that our stores
have no negative impact on the living
conditions of local communities
we install water-treatment facilities in our
key locations: petrol and sand catchers,
filtering stormwater from parking zones
and grease catchers; filtering waste from
our own-production facilities before it is
disposed into the public sewers
Annual Report 2017 CORPORATE GOVERNANCE
52
52 Corporate Governance
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
O’KEY Group of Companies
5353
7
1
0
2
t
r
o
p
e
R
l
a
u
n
n
A
Annual Report 2017
CORPORATE GOVERNANCE
54 Corporate
Governance System
O’KEY Group S.A. is a company incorporated under the Laws of
the Grand Duchy of Luxembourg with Global Depositary Receipts
(GDRs) listed on the London Stock Exchange, and as such is not
required to comply with the UK Corporate Governance Code.
O’KEY Group is committed to managing and conducting
its operations in accordance with applicable regulations of
Luxembourg and the London Stock Exchange.
We recognise our obligation to our shareholders to adopt
appropriate standards of governance and control, both
at the Board level and within our management teams,
and aim to establish and support a corporate governance
framework that is suitable for the development of our
business and meets the requirements of our shareholders.
The most significant decisions affecting the life of the
Company and the rights of shareholders, including the
approval of financial statements and the Annual Report,
appointment of the Directors, amendments of the Articles,
approval of the final dividend for the financial year, are
subject to review and approval at the Shareholders
meeting.
The Board of Directors and its committees provide
overall guidance for the business and strategic planning
for the Group. It sets strategic goals and oversees their
implementation by the CEO and senior Management of
the Group.
The Management Board and the Chief Executive Officer
are responsible for the day-to-day operations of the
companies of the Group and implement the strategy
approved by the Board of Directors.
THE GENERAL MEETING
OF SHAREHOLDERS
The General Meeting of Shareholders is O’KEY
Group S.A.’s supreme governing body. The General
Meetings of Shareholders are convened and held in
accordance with Luxembourg legislative requirements and
the Articles of O’KEY Group S.A. According to the Articles
of O’KEY Group S.A., the annual General Meeting shall
be held within six (6) months of the end of each financial
year in the Grand Duchy of Luxembourg at the registered
office of the Company, or at any such other place in the
Grand Duchy of Luxembourg as may be specified in the
convening notice of the meeting.
The next annual General Meeting will be held before
30 June 2018. A convening notice specifying the date, time,
address of the meeting and the agenda will be sent and
published no later than fourteen days before the meeting.
Transfer Restrictions
As of 31 December 2017, and the date hereof, to the
knowledge of the Company all shares in issue in the
Company are freely transferable, provided that the transfer
formalities set out under Article 6 of the Articles are
fulfilled.
The Company has no information about any agreements
between the shareholders which may result in restrictions
on the transfer of securities or voting rights, as mentioned
under Article 11 (1) (g) of the Directive 2004/25/EC of the
European Parliament and of the Council of 21 April 2004
on takeover bids.
Special Control Rights
All the issued and outstanding shares of the Company
have equal voting rights and there are no special control
rights attached to shares of the Company.
The Caraden Shareholder (as defined in the Articles) has,
under the condition of holding a minimum amount of
shares in the Company, a specific right with respect to
the appointment and removal of Directors as at least
one Director (designated as the Caraden Director) must
be appointed from a list of candidates proposed by the
Caraden Shareholder and may be removed at the initiative
of the Caraden Shareholder (additional information may
be found under Article 8 of the Articles).
The supporting vote of the Caraden Shareholder is
required, under certain conditions, to amend the provisions
of the Articles relating to: (i) the rights and prerogatives of
the Caraden Shareholder; and (ii) the appointment, removal,
replacement, rights, prerogatives and positive vote of the
Caraden Director (additional information may be found
under Article 16.4 of the Articles).
O’KEY Group of Companies PROFESSIONALISM
We strive to appoint individuals with relevant skills
and experience to the Board of Directors and its
committees in order to enable them to discharge their
respective duties and responsibilities effectively.
The Board is supplied, in a timely manner,
with information in a form and of a
quality appropriate to allow it to
discharge its duties.
55
EQUALITY
O’KEY Group’s corporate governance system is
designed to protect shareholders’ rights and ensure
equal treatment of all shareholders.
OUR CORPORATE
GOVERNANCE
PRINCIPLES
ACCOUNTABILITY
The Board of Directors is accountable to O’KEY
Group’s General Meeting of Shareholders and is
responsible for:
» formulating the Group’s strategy;
» establishing and maintaining systems, which
ensure due consideration of key decisions by
experienced individuals, including in the areas of
remuneration and incentives, internal control and
risk management;
» holding management accountable for the
successful implementation of the Group’s strategy.
TRANSPARENCY
We strive to ensure the appropriate disclosure of
reliable information on all significant issues related
to our operations including financial status, social
performance, operating results and ownership.
Control System in Employee Share Scheme
The Company does not have an employee share scheme.
by Shareholders for them to take part in any meeting
of shareholders in person or by proxy (Article 15 of the
Articles).
Voting Rights
Each share issued and outstanding in the Company bears
one vote.
The Articles do not provide for any voting restrictions.
In accordance with the Articles, a record date for the
admission to a general meeting may be set by the Board
(Article 15 of the Articles). Only those Shareholders as shall
be shareholders of record on any such record date shall
be entitled to be notified of and to vote at any general
meeting and any adjournment thereof, or to give any such
consent as the case may be.
In accordance with the Articles, the Board may
determine such other conditions that must be fulfilled
Shareholders’ Agreements with Transfer Restrictions
The Company has no information about any agreements
between shareholders which may result in restrictions on
the transfer of securities or voting rights.
Appointment of the Directors, Amendment
of the Articles
The rules governing the appointment and replacement
of the directors and the amendment of the Articles are set
out under Luxembourg Company Law and the Articles
(in particular Articles 8, 15 and 16).
The consolidated version of the Articles is published under
the Shareholders section of the Company website and is
available at: http://okeygroup.lu/sharedocs
Annual Report 2017 CORPORATE GOVERNANCE
56
Significant Agreements or Essential Business Contracts
The Board is not aware of any significant agreements to
which the Company is a party and which take effect, alter
or terminate upon a change of control of the Company
following a takeover bid. The Board has considered
essential business contracts and concluded that there are
none.
There are five members of our Board, including
one independent director. The General Meeting of
Shareholders appoints the Board members by a simple
majority of votes cast, for a period not exceeding six years
or until their successors are elected1.
Our current Board of Directors was elected at the General
Meeting of Shareholders held on 13 October 2015.
Agreements with Directors and Employees
Meetings of the Board of Directors
As of the date hereof, no agreements between the
Company and its Directors or employees exist that provide
for compensation if the Directors or the employees resign
or are made redundant without valid reason or if their
employment ceases because of a takeover bid.
Board of Directors
The Company’s Board of Directors plays the key role in
organising an efficient corporate governance system.
The Board is vested with the broadest powers to manage
the business of the Company and to authorise and
perform all acts of disposal and administration falling
within the purposes of the Company.
The Board is responsible for taking strategic decisions in
respect of the operation and development of the Group,
as well as overseeing the risk management and internal
audit functions of the Group. The decisions related to the
day-to-day operations of the Group are delegated to the
management.
The Board is also a management body of O’KEY
Group S.A. and is authorised to take all decisions in respect
of O’KEY Group S.A., unless they are reserved for the
General Meeting. The Board is not authorised to issue
or buy back shares. The repurchase by the Company
of its own shares is subject to the conditions set out in
the Company Law and the Articles.
Meetings of Board of Directors are held regularly in
compliance with the approved work schedule for the year.
The Board’s work schedule is determined on the basis
of strategic planning and the reporting cycle. Whenever
an urgent matter needs to be considered, Extraordinary
Board meetings are organised, or, if a personal meeting
cannot be organised due to short notice, the Board can
adopt a circular resolution by a unanimous vote. It is the
Board Chairman’s responsibility to determine the Board’s
work plan and to include additional items in the plan.
In 2017, the Board of Directors worked on the following
key tasks:
» preparation of the financial statements and annual
report, and review of the results for the year 2016;
» approval of the budget and business strategy for the
year 2017;
» review of the quarterly financial results, approval
of financial statements for 6 months of 2017 and
monitoring of compliance with risk management
strategy;
» determination of the Group’s strategic and operational
priorities;
» entering into a major transaction with X5 retail group
in connection with a strategic decision to focus on
two of the Group’s most profitable business segments:
hypermarkets and discounters.
Meetings of the Board of Directors
Member
Board of Directors
Audit Committee
Remuneration Committee
Heigo Kera
Dmitrii Troitskii
Dmitry Korzhev
Boris Volchek
Mykola Buinyckyi
(4 meetings)
attended 4
(4 meetings)
attended 4
1 attended, 2 by proxy
not a member
3 attended, 1 by proxy
4 by proxy 4
attended 4
attended 1
attended 1
attended 4
(1 meeting)
attended
by proxy
not a member
by proxy
not a member
1 The rules governing the appointment and replacement of the Directors are set out under the Law of 10 August 1915 on Commercial Companies, as
amended, and the Articles (in particular Articles 8, 15 and 16). The consolidated version of the Articles is published under the Shareholders section of the
Company website, available at: http://okeyinvestors.ru/shareholder/documents/
O’KEY Group of Companies MEMBERS OF THE BOARD OF DIRECTORS OF O’KEY GROUP S.A.
as at 31 December 2017:
57
HEIGO KERA
DMITRII TROITSKII
BORIS VOLCHEK
Group Chairman, Member
of the Audit Committee, Chair
of the Remuneration Committee
Member of the Board of Directors
Non-Executive Director
Caraden Director
Member of the Audit and
Remuneration Committee
Election
First elected to the Board of Directors in June
2010, and repeatedly re-elected since then
Election
First elected to the Board of Directors in June
2010 and repeatedly re-elected since then.
Election
First elected to the Board of Directors in June
2010 and repeatedly re elected since then.
Education
University degree in economics, Tallinn Technical
University (Estonia)
Education
University degree, State Marine Technical
University of St. Petersburg
Skills and Experience
2015–2017: CEO of O’KEY Group effective
1 May 2015
2008–present: the owner and a Member of the
Board of Directors of Silverko Consult OU
2002–2008: consultancy services, including
research on retail markets in Belarus, Kazakhstan
and China.
Committee Membership
Member of the Remuneration Committee
Member of the Audit Committee
Shares in O’KEY
Mr. Kera does not hold shares of O’KEY Group S.A.
Skills and Experience
2005–2007: Member of the Board of Directors
of the Ochakovo Dairy Plant
2005-present: Member of the Supervisory Board
of Bank Saint Petersburg, Development Director
of Neva-Rus
Committee Membership
Member of the Remuneration Committee
Shares in O’KEY
Mr. Troitskii indirectly owns ca. 33.05%
of the shares of O’KEY Group S.A.
Education
University degree, Leningrad Institute of Railway
Engineers (now St. Petersburg State University
of Communications)
Skills and Experience
1995-present: President of the Union Group
of companies
2000-present: General Director of St. Petersburg
Automobile Museum.
Committee Membership
Member of the Remuneration Committee
Member of the Audit Committee
Shares in O’KEY
Mr. Volchek indirectly owns ca. 29.52%
of the shares of O’KEY Group S.A.
DMITRY KORZHEV
Director Member
of the Audit Committee
MYKOLA BUINYCKYI
Independent Director
Chair of the Audit Committee
Election
First elected to the Board of Directors in June
2010 and repeatedly re-elected since then.
Election
First elected to the Board of Directors in October
2015. He also served on the Board in 2010-2013.
Education
University degree, State Marine Technical
University of St. Petersburg
Skills and Experience
2005-2010: Member of the Supervisory Board
of Bank Saint Petersburg
Education
University degree, The University of Edinburgh,
UK
A fellow of the Chartered Institute
of Management Accountants
A Member of the Institute of British Management
Joint diploma in management accounting
7 years as a management consultant with
Coopers & Lybrand.
Prior to that, he worked for several years
in senior financial management positions
in the oil support.
Committee Membership
Member of the Remuneration Committee
Shares in O’KEY
Mr. Buinyckyi does not hold shares of O’KEY
Group S.A.
Skills and Experience
Over 35 years in international financial
management and over 20 years’ experience
in Russia.
Committee Membership
Member of the Audit Committee
Shares in O’KEY
Mr. Korzhev indirectly owns ca. 11.73%
of the shares of O’KEY Group S.A.
Member of the Audit Committee
Member of the Remuneration Committee
Annual Report 2017 CORPORATE GOVERNANCE
58
Committees of the Board of Directors
The primary role of the Committees is to provide
assistance to the Board in preparing and adopting
decisions in its respective functional areas, as well as
to ensure that matters brought for consideration by the
Board of Directors are scrutinised prior to the Board
meetings. The meetings of the Committees usually take
place before the Board meeting. The Board Committees
have broad procedural powers and may engage
independent external experts, obtain any information from
the Company’s executive management that falls within
their remit and may use any other Company resources,
as well as set tasks for the Company’s management.
There are two committees on the Board of Directors:
the Audit Committee and the Remuneration Committee.
In total, 5 Committee meetings were held in 2017.
Audit Committee
Audit Committee Members
As of 31 December 2017, the Audit Committee comprised:
» Mykola Buinyckyi, Committee Chairman, Independent
Director of the Board of Directors;
» Boris Volchek, Committee Member, Caraden Director
of the Board of Directors;
» Dmitry Korzhev, Committee Member, Director of the
Board of Directors;
» Heigo Kera, Committee Member, Group Chairman,
Director of the Board of Directors;
» Ilya Ilin, Committee Member, non-director, external
consultant;
» Alvidas Brusokas, Committee Member, non-director,
external consultant.
Key Areas
The Audit Committee oversees the internal audit function,
the effectiveness of risk management and the internal
controls of the Company and the Group, and approves
and monitors the performance of the internal audit plan
for the year. The Audit Committee assists the Board of
Directors in fulfilling its oversight responsibilities relating to
the financial statements, including periodically reporting
to the Board of Directors on its activities and the adequacy
of internal control systems over financial reporting.
According to the Statute of O’KEY Audit Committee, the
Audit Committee shall consist of no fewer than three
current members of the Board of Directors, and shall be
chaired by an independent director.
The Committee’s Remit
» reviewing the IFRS financial statements for integrity
and transparency;
» analysing financial reporting processes, including
carrying out regular reviews and making
recommendations;
» recommending appointments and remuneration of the
Company’s external auditor to the Board of Directors
and maintaining an ongoing relationship with the
external auditor;
» analysing and supporting the internal audit system
and risk management procedures, including the drafting
of recommendations for their improvement.
Activities in 2017
The Audit Committee performed the following duties
during 2017:
» fulfilled oversight responsibilities relating to the integrity
of the Company’s annual financial statements;
» fulfilled oversight responsibilities relating to the integrity
of the Company’s half-yearly financial statements;
» reviewed reports prepared by the Internal Audit
department;
» reviewed effectiveness of the Company’s risk
management and internal control systems;
» reviewed policies and procedures published in the
Company;
» monitored reports as per the Company’s
Whistleblowing Policy;
» planned and agreed the scope of the audit of financial
statements for the year ended 2017 with the external
auditor of O’KEY Group;
» approved the Internal Audit plan for the year 2018.
Plans for 2018
The Audit Committee and the Company will continue
to focus on the following areas in 2018:
» how the Company’s management monitors
compliance with the Group’s risk management policies
and procedures, and reviews the adequacy of the risk
management framework in relation to the risks faced by
the Group;
» optimising the internal business processes involved
in the preparation of financial reporting.
Internal Audit Department
Internal Audit assists the Group’s Audit Committee in its
oversight role.
Internal Audit undertakes both regular and ad hoc reviews
of risk management controls and procedures, the results
of which are reported to the Audit Committee.
O’KEY Group of Companies 59
It is an independent department within the O’KEY Group
that functionally reports to the Audit Committee of the
Board of Directors and administratively reports to the
Deputy of CEO.
In 2017, the department audited the following business
processes: human resources, marketing, operation
activities, purchases, environmental compliance and
industrial safety. It also hired external consultants to help
audit the risk management system.
The Internal Audit Department’s plans for 2018 include
auditing the following business processes: e-commerce,
sales, government relations & public relations, and IT.
Remuneration Committee
Committee members
» Heigo Kera, Committee Chairman, Chairman of the
Board, Director of the Board of Directors;
» Boris Volchek, Committee Member, Caraden Director
of the Board of Directors;
» Dmitry Troitskii, Committee Member, Director of the
Board of Directors;
» Ilya Ilin, Committee Member, non-director, external
consultant;
» Alvidas Brusokas, Committee Member, non-director,
external consultant.
The Committee’s remit includes:
» reviewing the compensation policy;
» advising on any benefit or incentive schemes;
» making proposals to the full Board of Directors
regarding the remuneration of Executive Directors
and management (including Chief Executive Officer).
In 2017, the Committee worked closely with the Group
management to find ways to facilitate the further
optimisation of costs of the Group, as a result, some
changes to the KPIs and bonus policies are to be
introduced in 2018.
Activities in 2017:
During the reporting period, the Remuneration
Committee held one meeting. At that meeting, the
Committee reviewed the report on the remuneration,
bonuses and expenses of the Board and its Committees.
The committee reviewed the amount of remuneration
to be allocated to the management of the Group in 2016,
approved the Remuneration Committee Report and
suggested the total maximum amount of remuneration
of Directors for 2017 to be submitted for the approval
of the shareholders of the Company.
Remuneration
Members of the Board of Directors of O’KEY Group S.A.
receive remuneration of the amount approved by the
General Meeting of Shareholders. Members of the
Board and its Committees may be compensated for the
expenses they incurred in the course of their duties, in
accordance with the business and travel expenses policy
of O’KEY Group S.A.
Diversity
O’KEY Group is working on adoption of a diversity policy.
However, as can be seen from the information on the
senior management team, O’KEY Group aims to employ
the members of the team most suitable and qualified for
their post and function, irrespective of their age, gender or
origin. The requirements of educational and professional
backgrounds are such as to ensure that the members of
the team possess the skills and experience necessary to
perform their functions effectively.
Changes made to the Senior Management Team in 2017
Miodrag Borojevic
» 22.03.2017
» Chief Executive Officer of O’KEY
Ivan Dropulic
» 10.07.2017
» Chief Commercial Officer of O’KEY
Annual Report 2017 CORPORATE GOVERNANCE
60
SENIOR MANAGEMENT
O’KEY`s management team consists of experienced professionals,
whose expertise and enthusiasm drive our success. We have recruited
within Russia and internationally to ensure we have the best people,
who are able to bring a global perspective on the business combined
with deep knowledge of the Russian marketplace. The team was further
strengthened through the recruitment of selected senior managers
in 2017.
MIODRAG BOROJEVIC
CEO of O’KEY
Appointment
A member of the Management Board since
2017
Education
The University of Belgrade, Department
of Economics;
The Josip Juraj Strossmayer University
of Osijek, Department of Electrical
Engineering.
ARMIN BURGER
CEO of DA!
Appointment
A member of the Management Board
since 2013
Education
University of Freiburg, Department
of Economics
Skills and experience
2012-2013: CEO and a Member of the
Supervisory Board of Praktiker AG
KONSTANTIN ARABIDIS
CFO
Appointment
A member of the Management Board
since 2016
Education
St. Petersburg University, Department
of Economics;
Peter the Great Saint Petersburg
Polytechnic University, Department
of Technical Cybernetics;
Skills and experience
2014-2017: CEO REWE Italy
2002-2014: various executive positions
in Kaufland
2008-2011: Member of the Supervisory
Board Aldi Süd
1999-2008: CEO Hofer KG, Sattledt,
Austria
1990-1998: various positions
in Aldi GmbH
Member of Association of Chartered
Certified Accountants (ACCA).
Skills and experience
2012-2016: various positions
in O’KEY Group
Before 2012: various positions in PWC
O’KEY Group of Companies 61
PAVEL TOMANEK
Chief Operating Officer
Appointment
A member of the Management Board
since 2016
Education
Masaryk University in Brno, Department
of Clinical Psychology
ELENA POLOZOVA
Human Resources Director
Appointment
A member of the Management Board
since 2015
Education
Moscow International Higher School
of Business (MIRBIS), MBA;
Lipetsk State Technical University,
Department of Psychology.
ANTON FARLENKOV
Corporate Development Director
Appointment
A member of the Management Board
since 2016
Education
Urals State Technical University,
Department of Physics and Technology
IVAN DROPULIC
Chief Commercial Officer
Appointment
A member of the Management Board
since 2017
Education
The University of Zagreb, Department
of Economics
Skills and experience
2015-2016: O’KEY Sales Director for
the Northwest and Southern regions
2012-2015: Operations Director
in X5 Retail Group
2007-2008: Operations and Logistics
Director in Lenta
2000-2007: Senior Executive in Tesco
Skills and experience
2013-2015: Senior HR, OKEY
2003-2013: HR Business partner
in Magnit
Skills and experience
2006-2016: Head of EEMEA equity
research at Goldman Sachs
2003-2006: various positions in Royal
Dutch Shell, Infoshare
Skills and experience
2012-2017: Purchasing and Marketing
Director, Member of the Board of
Kaufland Croatia
2007-2012: Fresh Food Director
at Kaufland Croatia
Up to 2007: various positions at Pik
Vrbovec and Jamnica
IVART PAPLI
Director for Security and Risk Management
Appointment
A member of the Management Board
since 2015
Institute of Economics (Estonia), Licence
in company’s economic safety,
Licence in fraud investigations (CFI).
Education
Tallinn University, Department of culture
Baltic Business Security School, Licence
in security management;
Skills and experience
2012-2015: Risk & Security manager
IKEA Russia
2002-2012: various positions at DHL
Annual Report 2017 CORPORATE GOVERNANCE
62 Risk Management System
d
e
t
c
e
p
x
E
K
S
I
R
E
H
T
F
O
Y
T
I
L
I
B
A
B
O
R
P
l
y
e
k
L
i
d
r
a
z
a
H
-
w
o
L
)
i
d
e
v
e
c
r
e
p
(
)
l
e
b
i
s
s
o
p
(
y
t
i
l
i
b
a
b
o
r
p
e
t
o
m
e
R
6
7
10
11
9
8
1
2
3
14
12
5
13
4
Immaterial
Minimum
Medium
Material
Irretrievable
MATERIALITY (AFFECT) OF THE RISK
The risk management system is intended to provide
a reasonable guarantee that the Company’s strategic
goals will be achieved in a timely manner, and that the
degree of risk faced by the Group remains acceptable
for both management and shareholders. We operate a
unified approach to risk management through the Group
Risk Standard, which comprises a range of relevant tools
and methodologies aimed at early risk detection and risk
mitigation.
The Board of Directors has overall responsibility for
the establishment and oversight of the Group’s risk
management framework. The Group’s Audit Committee
oversees how management monitors compliance within
the Group’s risk management policies and procedures,
and reviews the adequacy of the risk management
framework in relation to the risks faced by the Group.
Internal Audit assists the Group’s Audit Committee in its
oversight role. Internal Audit undertakes both regular
and ad hoc reviews of risk management controls and
procedures, the results of which are reported to the
Audit Committee. The Group, through its training
and management standards and procedures, aims
to develop a disciplined and constructive control
environment, in which all employees understand their
roles and obligations. Identified risk areas are monitored
quarterly and followed by a coordinated improvement
programme.
OUR CHALLENGES IN 2017
In 2017, we focused on the operating efficiency of the
Company. With the sale of our supermarket business
in December 2017, we began a new stage in the
development of our company. Our organisational
structure was updated in line with our strategic vision, and
this will allow us to focus on the key priorities of the Group:
achieving improved efficiency in our city hypermarkets
and accelerating the expansion of discounters.
Additionally, we focused on costs control, optimisation
of commercial policies and improving our assortment
mix. As a result of this process optimisation, we achieved
a notable decrease in personnel costs, both at store and
head office level.
During 2017, we continued to increase logistics
centralisation and the effectiveness of operations at store
and head office levels. Through continuous and timely
work with our suppliers, we achieved an improved overall
centralisation rate of almost 60% by the end of 2017, up
from 40% at the same period in 2016.
O’KEY Group of Companies
63
PRINCIPLE RISKS
Below, we describe the key risks that could have a material
adverse effect on our business, our financial and operational
performance and, as a result, could affect both our share
price and reputation.
Additional risks not known to us, or those risks that we
currently consider immaterial, may also impair our business
operations. We do not expect to incur any risks that may
jeopardise the continuity of our business.
Name of Risk
Definition & Potential Impact
Mitigating Actions
STRATEGIC RISKS
1
Economic Outlook
2
Competition Risk
3
Political Risk
4
Regulatory Risk
Our business is affected by uncertainties
associated with changing economic conditions,
particularly in the current environment of global
economic instability. Therefore, we may face
reduced customer demand as the income and
purchasing power of our customers decreases
under the weight of a weaker macroeconomic
environment, exacerbated by declining oil prices
and sustained rouble volatility.
The retail sector in Russia is highly competitive.
We face strong competition from other retailers
(Russian and international), some of which are
larger and have greater resources. Retail chains
compete mainly over store locations, product
ranges, price, service and store conditions. Some
competitors might be more effective and faster
in capturing certain market opportunities, which
in turn may negatively impact our market share
and our ability to achieve our performance and
expansion targets.
Political developments may adversely impact the
macroeconomic environment and the market in
which our company operates. Although political
stability in Russia has improved, Russia is still a
state whose political, economic and financial
systems are rapidly developing and changing.
Our operations are subject to various government
regulations and industry-specific legislation with
respect to quality, packaging, health and safety,
labelling, distribution and other standards. Some
regulations are still being developed in Russia.
Current and future government regulations or
changes thereto may require us to change the
way we run our operations and could result in cost
increases. Failure to comply with regulations can
also lead to reputational damage.
We closely monitor the changes in the
macroeconomic environment, income
levels, consumer confidence index and other
indicators. Therefore, if significant unfavourable
developments occur, we are ready to take
corrective steps and adjust our business model.
We focused on enhancing our customer value
proposition through the introduction of a
competitive pricing policy, the implementation
of effective marketing initiatives and assortment
structure improvement.
We put considerable effort into aligning our
hypermarket price perceptions with the ‘best value
for money’ concept. In this context, we launched
an extended marketing campaign based on the
price-match guarantee across the wide range of
top-selling products offered at our hypermarkets.
Although these risks are outside the control of the
Group, O’KEY monitors political developments
closely and maintains strong relationships with
various national industry bodies.
We aim to ensure compliance with all
applicable regulations by monitoring regulatory
developments and changes, and by following up
and responding to changes in regulations and
standards in a timely manner.
The new terms of Trade Law had significant
influence on all players on the market. During
the second half of 2016, and the first quarter of
2017, we developed and implemented essential
changes in the Company’s main business
processes and updated relevant internal policies
and procedures.
Annual Report 2017
CORPORATE GOVERNANCE
64
Name of Risk
Definition & Potential Impact
Mitigating Actions
OPERATIONAL RISKS
Changing Customer
Expectations
5
We strive to provide our customers with a wide
range of goods and services, at competitive
prices. However, we recognise that our customers’
shopping habits and expectations are influenced
by the economic environment and will change
over time.
To maximise the efficiency and relevance of such
assessments, we monitor internal and external
reports on retail market developments and
changes in O’KEY positioning.
During the FY 2017, as a result of continual analysis
of the assortment structure and negotiations
with our suppliers, we enhanced the volume of
promotional campaigns and developed goods
that meet the expectations of our customers with
regards to price, volume and quality.
6
Employee Recruitment
and Retention
Competition for highly qualified management and
store personnel remains intense in Russia. For our
plans of expansion to materialise, we need highly
skilled employees. Our future success depends
in part on our continued ability to hire, and retain
new employees. We understand that any inability
to attract and retain highly qualified employees
and key personnel in the future could have an
adverse effect on our business.
To improve motivation, we have developed
a system of Performance Appraisal that is
conducted on a regular basis and rewards
employees based on their individual results.
We also promote internal opportunities for
career development via training and special
programmes.
7
Supply Chain Risk
8
IT Platform Development
9
IT Security Threats
Our financial performance depends in part on
reliable and effective supply chain management. We
rely on third parties to supply us with merchandise
and services. The third parties that supply us
with merchandise and services also have other
customers and may not have sufficient capacity
to meet all of their customers’ needs, including
ours, during periods of excess demand. Shortages
and delays could materially harm our business.
Unanticipated increases in prices could also
adversely affect our performance. Furthermore,
we may be exposed to the risk of delays and
interruptions to our supply chain as a consequence
of natural disasters, in case we are unable to identify
alternative sources of supply in a timely manner.
Execution of our strategic targets requires
the adaptation of our current IT infrastructure
to changing business needs. As the business
grows, the complexity of processes supporting
it and diversity of tasks around such growth will
increase. Delayed or inappropriate decisions on
development of the infrastructure can lead to
failures in meeting Group goals and impede the
attainment of longer-term goals.
We are observing an increase in IT security
threats and higher degrees of professionalism in
cybercrime. Our systems and solutions, as well
as those of our counterparties, remain potentially
vulnerable to attack. Depending on their nature
and scope, such attacks could potentially lead
to the leakage of confidential information,
improper use of our systems, manipulation and
destruction of data, sales downtimes and supply
shortages, which in turn could adversely affect
our reputation, competitiveness, and business,
financial and operational performance.
Additionally, to facilitate the adaptation of new
employees, we organise introductory courses and
coaching in our stores.
Throughout 2017, we continued to increase
logistics centralisation and the effectiveness of
operations at store and head office levels. The
continuous and timely work with our suppliers
resulted in an improved overall centralisation rate
of almost 60% by the end of 2017, up from 40% at
the end of 2016.
In line with our commitment to the ‘lean store –
lean office’ concept, we carried out a restructuring
of our head office in Q4’17 which resulted in a
more transparent and efficient organisational
structure.
At the end of 2016, we began the integration of
several core IT systems that will allow us to meet
the modern demands of the market.
In 2017, we implemented these systems in several
areas of operation as part of the pilot project and
witnessed improvement in the operations of our
store and head office processes as a result.
In 2018, we plan to finish the implementation of
these systems.
We employ a number of measures, including
employee training, comprehensive monitoring of
our networks and systems, and maintenance of
backup and protective systems such as firewalls
and virus scanners in order to reduce the threats
to our IT security.
O’KEY Group of Companies
Name of Risk
Definition & Potential Impact
Mitigating Actions
65
FINANCIAL RISKS
Provision of Sufficient
Financing
10
11
Tax Regulations
Recent changes in the macroeconomic situation
might result in a liquidity squeeze and the
tightening of lending policies by Russian banks.
Given the Group plans for expansion in the
coming periods, issues with the availability of
external financing or significant changes in its cost
could negatively impact our ability to execute the
programme.
Russian tax law has complex tax rules, which may
be interpreted in different ways and such rules are
subject to frequent changes. Examinations by tax
authorities and changes in tax regulations could
adversely affect our business, and financial and
operational performance.
Changes in tax law could result in higher tax
expense and payments. Furthermore, legislative
changes could materially impact tax receivables
and liabilities, as well as deferred tax assets and
deferred tax liabilities.
We maintain available lines of credit to close
potential liquidity gaps.
We diversify and enlarge the list of partnering
banks to increase our control over the availability
and cost of financing. Our securities are listed
on the London Stock Exchange that allows us to
utilise the secondary placement of shares as an
alternative means of financing.
Our tax and legal specialists review compliance
with applicable tax regulations, current
interpretations issued by the authorities and
judicial precedents resulting from tax disputes.
This work is conducted on a regular basis and in
a consistent way, ensuring we are aware of any
changes that we may need to implement.
12
Changes in Working Capital
The inability to control and manage elements of
the working capital can result in negative changes
for the operating cash flow, leading to liquidity
gaps and excessive reliance on external financing.
We exercise constant control over the working
capital, which is detailed in our monetary policy.
The aim of this policy is to minimise prepayment
balances and control overdue receivables.
13
Risk of Currency and
Interest Rate Volatility
14
Risk of Misstatements in
Financial Statements
We are exposed to fluctuations in exchange rates
because of loans received in USD and contractual
obligations in USD and EUR. Although measures
are taken to minimise this risk, there can be no
assurance that exchange rate and interest rate
fluctuations will not negatively influence our
results.
We face exposure to risks relating to failures in
proper financial reporting and the classification of
accounting entries, and risks of making inaccurate
accounting estimates.
We are also taking steps to improve stock
management efficiency by establishing and
monitoring KPIs and organising training sessions
for store employees.
We manage interest rate risks by borrowing
money at fixed rates with a long tenor. These
facilities do not provide the lender with the right
to increase the interest rate due to any changes
in the money market. Certain currency risks
are controlled through switching the payments
into roubles, setting caps or are hedged using
derivative financial instruments.
We regularly test internal controls over financial
reporting to prevent misstatements in financial
statements. We have a qualified team of finance
professionals preparing our financial statements,
and our consolidated IFRS financial statements
preparation process is completely automated.
For a description of financial risks and exposure
calculation, please refer to note 30 in the Group
Consolidated Financial Statements.
Annual Report 2017
CORPORATE GOVERNANCE
66
Information
for Shareholders
and Investors
SHARE CAPITAL
O’KEY Group S.A. share capital amounts to EUR 2,690,740
divided into 269,074,000 ordinary shares of a nominal
value of EUR 0.01 each. As at the date of this report, the
Company’s share capital has remained unchanged since
30 November 2010.
All shares issued by the Company have equal rights as
provided for by the law of 10 August 1915 on commercial
companies, as amended (the ‘Company Law’) and as set
forth in the Articles, save for the special rights granted
to the Caraden Shareholder.
Significant Shareholdings
The three major indirect shareholders of the Group are its
founders:
» Mr. Dmitri Troitskii (who indirectly owns approximately
33.05% of the outstanding share capital of O’KEY
Group S.A.);
» Mr. Dmitry Korzhev (who indirectly owns approximately
11.73% of the outstanding share capital of O’KEY
Group S.A.);
» Mr. Boris Volchek (who indirectly owns approximately
29.52% of the outstanding share capital of O’KEY
Group S.A.).
In September 2017, Mr. Volchek informed the company
that he had acquired additional GDRs, increasing his
ownership from 28.02% to 29.52% of the total outstanding
share capital.
In November – December 2017, the share indirectly
owned by Mr. Korzhev decreased from 23.49% to 11.73%,
and the share indirectly owned by Mr. Troitskii increased
from 23.49% to 33.05%.
Global Depositary Receipts (GDRs)
Global Depositary Receipts (GDRs) are issued in respect
of ordinary shares at a ratio of one ordinary share per
one GDR. The GDRs are traded on the London Stock
Exchange. The Company’s depositary bank is The Bank
of New York Mellon.
As of 31 December 2017, GDRs represented 38.17%
of O’KEY Group S.A. share capital.
No other securities have been issued by the Company.
Stock Exchange
As of 31 December 2017, O’KEY Group S.A. GDRs were
traded on the London Stock Exchange.
Share Capital Structure – Direct Holdings
Trading Floor of O’KEY Group S.A. GDRs
50.96%
NICEMAX CO LTD
29.52%
GSU LTD
19.52%
Free float
Trading floor
Ticker code
London Stock Exchange
OKEY
O’KEY Group S.A. Securities Identification Numbers
CUSIP1
Regulation S GDRs
Rule 144A GDRs
ISIN2
Regulation S GDRs
Rule 144A GDRs
Code
670866201
670866102
Code
US6708662019
US6708661029
1 CUSIP (Committee on Uniform Security Identification Procedures) – identification number given to the issue of shares for the purposes of facilitating clearing.
2 ISIN (International Securities Identification Number) – international identification number of the share.
O’KEY Group of Companies O’KEY Group S.A. Share Price Performance and Trading Volumes in 2017
London Stock Exchange (GDRs)
67
5.0
4.0
3.0
2.0
1.0
0
3.0
2.5
2.0
1.5
1.5
January February March
April
May
June
July
August
September October
November
December
GDR price, US$/GDR (right axis)
Trading volume, US$ mln (left axis)
Total Shareholder Return3
Analyst Coverage
TSR 2017
TSR 2016
TSR 2015
O'KEY Group S.A.
Peer average
-3.53%
28.96%
-55.63%
-7.42%
24.64%
7.00%
10 equity research analysts from leading banks, including
Goldman Sachs, Credit Suisse, Morgan Stanley, JP Morgan,
VTB Capital and Sberbank CIB, follow the Company on
a regular basis. O’KEY’s IR team routinely monitors and
communicates analyst consensus to the Company’s top
management.
O’KEY Group S.A. GDRs Trading Information (market
transactions, Bloomberg)
DIVIDENDS
Dividend Policy
Annual maximum price, US$
Annual minimum price, US$
Year-end price, US$
Trading volume (mln units)
2017
2.7
1.8
2.5
24.5
2016
2.6
1.5
2.6
29.8
Source: Bloomberg – applicable to all the tables above
Credit Ratings
Credit rating
Outlook
Fitch
B+
Stable
Last rating date
15 January 2018
In September 2012, the Company received an investment
grade credit rating from Fitch international rating agency.
In January 2018, Fitch affirmed O’KEY Group S. A.’s B+
rating with the Stable outlook.
To determine the recommended amount of dividends that
will be payable, the Group’s Board of Directors abides by
the dividend policy. The general meeting of shareholders,
upon recommendation of the Board of Directors,
determines how the remainder of the annual net profits of
the Company should be disposed of, including by way of
stock dividend, it being understood that the remaining net
profits of the Company left after payment of dividends shall
be used for business development of the Company and its
subsidiaries and the development of the retail business of
the Group in Russia. Interim dividends may be declared and
paid (including by way of staggered payments) by the Board
of Directors, subject to observing the terms and conditions
provided by law either by way of a cash dividend or by way
of an in kind dividend.
Annual Report 2017
CORPORATE GOVERNANCE
68
Period
Interim dividends 2011
Interim dividends 2012
Interim dividends 2013
Interim dividends 2014
Interim dividends 2014
Interim dividends 2015
Interim dividends 2016
Interim dividends 2017
Interim dividends 2018
Record date
Amount of dividend
per GDR (US$ cents,
gross)
Amount of accrued
dividend (US$, gross)
12.09.2011
23.02.2012
15.02.2013
18.02.2014
17.10.2014
11.09.2015
08.07.2016
20.01.2017
25.01.2018
9.9481
10.254
18.953
22.670
7.433
8.920
8.548
9.167
12.367
26,767,750.60
27,590,847.96
50,997,595.22
60,999,075.80
20,000,270.42
24,001,400.80
23,000,445.52
24,666,013.58
33,276,381.58
Taxation
Information disclosure
As a general rule, the Company withholds 15% WHT from
the dividend paid from Luxembourg for distribution to the
holders of GDRs.
The Company takes great care to ensure that any relevant
information is released to all shareholders and analysts at the
same time, in accordance with the transparency principles.
This information is provided for information purposes only.
Potential and current investors should seek the advice
of professional consultants on tax matters related to
investments in the shares and GDRs of the Company.
INVESTOR RELATIONS
Communication and Dialogue
Transparent communication with all shareholders is one
of O’KEY’s top priorities. The Company’s management
maintains regular dialogue with institutional investors
and sell-side analysts through participation in meetings,
presentations, international conferences and conference
calls, during which it discusses the Company’s financial
results and provides an overview of the retail market.
O’KEY understands the importance of keeping
the investment community informed of the latest
developments and provides updated outlooks in order
to build an understanding of the Company’s investment
case.
In 2017, O’KEY maintained active communications with
investors through the following activities:
» a roadshow involving senior management to meet with
institutional investors in the UK;
» participation of the Company’s management in a
number of leading international market conferences
focused on emerging markets;
» conference calls on financial results and an overview
of the retail market.
Generally, the information is distributed through the
following channels:
» London Stock Exchange website: the Company posts
price-sensitive information on the LSE site through the
information disclosure system (RNS);
» O’KEY website: the Company publishes releases on
important events and financial results, as well as
provides regular updates in relation to O’KEY operations.
Any interested parties can subscribe online to receive
news updates by registering online.
O’KEY posts its annual reports on its website,
www.okeyinvestors.ru, on the day of the report’s official
publication and sends out a press release to announce
the publication.
The website is regularly updated.
» Social media: O’KEY selectively uses social media
as an additional channel of information disclosure
and to distribute Company and industry news, as well
as to highlight coverage in the media.
For more information, please visit O’KEY’s official
Facebook page at https://facebook.com/okmarket.ru,
the Vkontakte page at https://vk.com/okmarketru,
and the Odnoklassniki page at https://ok.ru/okmarket.
» E-mail
The Investor Relations Department can be contacted
with respect to any queries at: ir@okmarket.ru
There have been no substantial changes in our approach
to disclosure in 2017 compared to 2016.
Footnote: this annual financial report is drawn up and published in accordance with the applicable UK laws and regulations. The information given from pages
1 to 68 includes most (and to some extent more) of the information included in the consolidated directors’ report but should not be considered as
being the consolidated directors’ report for the purpose of Luxembourg laws and regulations, which is drawn up and disclosed in accordance with
applicable Luxembourg laws and regulations.
O’KEY Group of Companies Management & Directors
Responsibility Statement
69
We confirm, to the best of our knowledge, that the consolidated financial statements which have been prepared in
accordance with the International Financial Reporting Standards as adopted by the European Union, give a true and fair
view of the assets, liabilities, financial position and profit or loss of O’KEY Group S.A., and the undertakings included in the
consolidation taken as a whole, and that the consolidated Directors’ report includes a fair review of the development and
performance of the business and the position of O’KEY Group S.A. and the undertakings included in the consolidation taken
as a whole, together with a description of the principal risks and uncertainties they face.
Luxembourg, 26 March 2018
Dmitry Korzhev
Member of the Board
of Director
Mykola Buinyckiy
Member of the Board
of Director
Miodrag Borojevic
CEO of O’KEY
Heigo Kera
Chairman
Konstantin Arabidis
CFO
Annual Report 2017
FINANCIAL STATEMENTS
70
i
s
e
n
a
p
m
o
C
f
o
p
u
o
r
G
Y
E
K
O
’
O’Key Group S.A.
Consolidated Financial
Statements for the year
ended 31 December 2017
(WITH THE REPORT OF THE RÉVISEUR D’ENTREPRISES AGRÉÉ THEREON)
CONTENTS
Report of the Réviseur d’Entreprises Agréé
Consolidated Statement of Financial Position as at 31 December 2017
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2017
Consolidated Statement of Changes in Equity for the year ended 31 December 2017
Consolidated Statement of Cash Flows for the year ended 31 December 2017
Notes to the Consolidated Financial Statements for the year ended 31 December 2017
81
1 Reporting entity
82
2 Basis of accounting
82
3 Functional and presentation currency
82
4 Use of estimates and judgments
83
5 Determination of fair values
84
6 Operating segments
85
7 Subsidiaries
85
8 Sale of supermarkets
86
9 Revenue
86
10 General, selling and administrative expenses
87
11 Other operating income and expenses, net
87
12 Personnel costs
88
13 Finance income and finance costs
88
14 Foreign exchange (loss)/gain
88
15 Income tax expense
89
16 Investment property
90
17 Property, plant and equipment
91
18 Lease rights
92
19 Intangible assets
20 Deferred tax assets and liabilities
21 Other non-current assets
22 Inventories
23 Trade and other receivables
24 Non-current assets held for sale
25 Cash and cash equivalents
26 Equity
27 Earnings/(loss) per share
28 Loans and borrowings
29 Trade and other payables
30 Financial instruments and risk management
31 Operating leases
32 Capital commitments
33 Contingencies
34 Related party transactions
35 Events subsequent to the reporting date
36 Basis of measurement
37 Significant accounting policies
71
76
77
78
80
81
93
94
95
95
95
96
96
96
97
98
99
104
105
105
106
107
107
108
KPMG Luxembourg, Société coopérative
39, Avenue John F. Kennedy
L - 1855 Luxembourg
Tel.: +352 22 51 51 1
Fax: +352 22 51 71
E-mail: info@kpmg.lu
Internet: www.kpmg.lu
Report of the Réviseur
d’Entreprises Agréé
71
To the Shareholders of
O’KEY GROUP S.A.
46A, Avenue J.F. Kennedy
L-1855, Luxembourg
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
Opinion
We have audited the consolidated financial statements of O’KEY GROUP S.A. and its subsidiaries (the “Group”), which
comprise the consolidated statement of financial position as at 31 December 2017, and the consolidated statement
of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated
statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a
summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated
financial position of the Group as at 31 December 2017, and of its consolidated financial performance and its
consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union.
Basis for Opinion
We conducted our audit in accordance with the EU Regulation N° 537/2014, the Law of 23 July 2016 on the audit
profession (“Law of 23 July 2016”) and with International Standards on Auditing (“ISAs”) as adopted for Luxembourg
by the “Commission de Surveillance du Secteur Financier” (“CSSF”). Our responsibilities under the EU Regulation N°
537/2014, the Law of 23 July 2016 and ISAs are further described in the « Responsibilities of “Réviseur d’Entreprises
agréé” for the audit of the financial statements » section of our report. We are also independent of the Group in
accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants
(“IESBA Code”) as adopted for Luxembourg by the CSSF together with the ethical requirements that are relevant to our
audit of the consolidated financial statements, and have fulfilled our other ethical responsibilities under those ethical
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These matters were addressed in the context of the audit of
the consolidated financial statements as whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
Annual Report 2017 FINANCIAL STATEMENTS
72
SUPPLIERS’ BONUSES
Please refer to note 4 (estimates and judgements) and note 23 (financial disclosures).
a. Why the matter was considered to be one of the most
significant in our audit of the annual accounts of the
current period
The Group receives various bonuses from suppliers based
on volume-related allowance, promotional and marketing
allowances and discounts received in connection with the
purchase of goods. This represents a significant reduction in
the cost of sales and inventory.
The calculation of bonuses is in part dependent on an
estimation of whether these amounts due under various
agreements with suppliers have been earned at the
reporting date based on inventory purchased and other
conditions such as promotional activities or marketing
compaign undertaken by the Group for certain goods.
The process for calculating and recording supplier bonuses
involves significant manual processes which are more
susceptible to error.
b. How the matter was addressed in our audit
Our procedures over supplier bonuses included, but were not
limited to:
ɮ We tested key internal controls over completeness, existence
and accuracy of recoginsed bonuses from suppliers, including
authorisation and performance review of recorded bonuses
versus budget and historical data.
ɮ We tested the Group’s manual calculations made in the process
of recording of supplier bonuses. With assistance of our own
IT specialists we tested accuracy and completeness of system-
generated reports which the Group used as input data for these
manual calculations. We agreed relevant data elements in these
reports to source documents on a sample basis.
ɮ We compared bonuses’ trends by bonus type, product category
and supplier to historical data adjusted for current market
conditions where necessary.
ɮ We agreed bonuses receivable as at year-end to external
confirmations obtained from suppliers on a sample basis.
ɮ We recalculated the effects of reduction in the inventory cost
due to allocation of bonuses to unsold inventory and compared
results to the amounts determined by the Group.
VALUATION OF DEFERRED TAX ASSET
Please refer to notes 4 (estimates and judgements) and note 20 (financial disclosures).
a. Why the matter was considered to be one of the most
significant in our audit of the annual accounts of the
current period
The Group has recognised significant deferred tax asset in
respect of tax losses carried forward by LLC Fresh Market, a
subsidiary operating a discounter chain. The recovery of the
deferred tax asset depends on achieving sufficient taxable
profits by the discounter chain in the future.
There is an inherent uncertainty involved in forecasting the
timing and amount of future taxable profits, which supports
the extent to which deferred tax asset is to be recognised.
The discounter business is relatively new for the Group and
historical data on financial results of the discounter chain is
limited.
Therefore, this is a key judgmental area our audit is
concentrated on.
b. How the matter was addressed in our audit
Our procedures over valuation of deferred tax asset included, but
were not limited to:
ɮ The Group prepares taxable profits forecast model based on the
long-term budget of the discounter chain. We tested design and
implementation of key internal controls over preparation of the
discounter chain’s long-term budget.
ɮ We analysed the underlying methodology and tested the
mathematical accuracy of the taxable profits forecast model
used to estimate the amount of the deferred tax asset to be
recognised by the Group.
ɮ We evaluated the appropriateness of the Group’s key
assumptions used in taxable profits forecast such as revenue
growth and operating profit margin through comparison of the
forecast to historical performance and observable market data,
including competitors’ historical data and inflation rate forecasts.
ɮ We challenged the Group’s assumptions regarding expansion of
the discounter chain by comparing them to the Group’s long-
term cash-flow forecast and historical cash-flow trends.
ɮ We assessed the accuracy of the Group’s forecasts used in prior
years to obtain information regarding the effectiveness of the
Group’s forecasting process and identify potential bias.
ɮ We also assessed the adequacy of Group’s disclosures in respect
of deferred tax asset.
O’KEY Group of Companies 73
SALE OF SUPERMARKETS
Please refer to note 4 (estimates and judgements) and note 8 (financial disclosures).
a. Why the matter was considered to be one of the most
significant in our audit of the annual accounts of the
current period
b. How the matter was addressed in our audit
During the year ended 31 December 2017 the Group
entered into a complex arrangement to sell most of its
supermarket business.
Our procedures over sale of supermarkets included, but were not
limited to:
ɮ We reconciled the consideration received for the sale to the sale
The net book value of assets already disposed and to
be disposed and the sale proceeds are significant to the
Group’s consolidated financial statements.
The arrangement is structured into several stages.
Significant judgement is required to determine the part of
the total consideration for the sale of supermarkets that
should be recognised during the year ended 31 December
2017 and the part that should be deferred to the year ending
31 December 2018.
Significant judgement is required to assess the effect
of indemnities and warranties included in the sale
agreement on the sale proceeds recognised in the Group’s
consolidated financial statements.
agreement.
ɮ We assessed whether the total consideration for the sale
was allocated to the components of the arrangement in the
proportion to their fair values.
ɮ We evaluated whether the timing of the gain recognized
for each significant component corresponds to the transfer
of control or substantial risks and rewards to the buyer as
appropriate.
ɮ We inspected key terms of the sale agreement and assessed
whether the effect of the seller’s warranties and indemnities to
the buyer was appropriately recognised as a part of the sale’s
consideration.
ɮ We also assessed the adequacy of the Group’s disclosures
related to the sale of supermarkets and non-current assets held
for sale.
Other information
The Board of Directors is responsible for the other information. The other information comprises the information
included in the annual report, the consolidated Directors’ report and the Corporate Governance Statement but does
not include the consolidated financial statements and our report of “Réviseur d’Entreprises agréé” thereon.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any
form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the
work we have performed, we conclude that there is a material misstatement of this other information we are required
to report this fact. We have nothing to report in this regard.
Responsibilities of the Board of Directors and Those Charged with Governance for the consolidated financial statements
The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements
in accordance with IFRSs as adopted by the European Union, and for such internal control as the Board of Directors
determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations,
or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Annual Report 2017 FINANCIAL STATEMENTS
74
Responsibilities of the Réviseur d’Entreprises agréé for the audit of the consolidated financial statements
The objectives of our audit are to obtain reasonable assurance about whether the consolidated financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue a report of “Réviseur
d’Entreprises agréé” that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with the EU Regulation N° 537/2014, the Law of 23 July 2016 and with ISAs as
adopted for Luxembourg by the CSSF will always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with the EU Regulation N° 537/2014, the Law of 23 July 2016 and with ISAs as adopted
for Luxembourg by the CSSF, we exercise professional judgment and maintain professional skepticism throughout the
audit. We also:
» Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
» Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
» Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by the Board of Directors.
» Conclude on the appropriateness of Board of Directors’ use of the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant
doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our report of “Réviseur d’Entreprises agréé” to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our report of “Réviseur d’Entreprises agréé”. However, future events or conditions may
cause the Group to cease to continue as a going concern.
» Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
» Obtain sufficient appropriate audit evidence regarding the consolidated financial information of the entities and business
activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the
direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing
of the audit and significant audit findings, including any significant deficiencies in internal control that we identify
during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key audit
matters. We describe these matters in our report unless law or regulation precludes public disclosure about the matter.
O’KEY Group of Companies REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
75
We have been appointed as “Réviseur d’Entreprises agréé” by the General Meeting of the Shareholders on 6 October
2010 and the duration of our uninterrupted engagement, including previous renewals and reappointments, is 8 years
since the Company became public interest entity.
The consolidated Directors’ report, which is the responsibility of the Board of Directors, is consistent with the
consolidated financial statements and has been prepared in accordance with applicable legal requirements.
The Corporate Governance Statement, included in the consolidated Directors’ report, is the responsibility of the Board
of Directors. The information required by Article 68ter paragraph (1) letters c) and d) of the law of 19 December 2002
on the commercial and companies register and on the accounting records and annual accounts of undertakings,
as amended, is consistent with the consolidated financial statements and has been prepared in accordance with
applicable legal requirements.
We confirm that the audit opinion is consistent with the additional report to the audit committee or equivalent.
We confirm that the prohibited non-audit services referred to in the EU Regulation No 537/2014, on the audit
profession were not provided and that we remain independent of the Group in conducting the audit.
OTHER MATTER
The Corporate Governance Statement includes information required by Article 68ter paragraph (1) of the law of
19 December 2002 on the commercial and companies register and on the accounting records and annual accounts of
undertakings, as amended.
Luxembourg, 26 March 2018
KPMG Luxembourg
Société coopérative
Cabinet de révision agréé
Jean-Manuel Séris
Annual Report 2017 FINANCIAL STATEMENTS
76
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017
’000 RUB
ASSETS
Non-current assets
Investment property
Property, plant and equipment
Construction in progress
Lease rights
Intangible assets
Deferred tax assets
Other non-current assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Prepayments
Other investments
Cash and cash equivalents
Non-current assets held for sale
Total current assets
Total assets
EQUITY AND LIABILITIES
Equity
Share capital
Legal reserve
Additional paid-in capital
Hedging reserve
Retained earnings
Translation reserve
Total equity
Non-current liabilities
Loans and borrowings
Deferred tax liabilities
Other non-current liabilities
Total non-current liabilities
Current liabilities
Loans and borrowings
Interest accrued on loans and borrowings
Trade and other payables
Current income tax payable
Total current liabilities
Total liabilities
Total equity and liabilities
Note
2017
2016
16
17
17
18
19
20
21
22
23
25
24
26
28
20
28
28
29
1 075 010
44 964 135
3 313 175
4 437 856
961 108
1 917 572
1 817 452
58 486 308
13 524 236
10 275 841
1 280 658
10 290
7 750 177
129 589
32 970 791
91 457 099
119 440
10 597
8 555 657
(99 861)
15 025 513
639 633
572 542
48 241 868
3 485 879
4 578 535
893 103
1 277 273
2 002 680
61 051 880
13 706 868
5 871 010
958 467
41 250
11 463 467
-
32 041 062
93 092 942
119 440
10 597
8 555 657
(75 329)
13 324 398
720 301
24 250 979
22 655 064
24 679 352
31 673 078
888 997
121 890
692 091
139 304
25 690 239
32 504 473
11 429 881
231 897
4 465 260
156 870
28 854 731
32 480 892
999 372
41 515 881
67 206 120
91 457 099
830 383
37 933 405
70 437 878
93 092 942
Consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out
on pages 76to 111.
O’KEY Group of Companies CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 2017
77
’000 RUB
Revenue
Cost of goods sold
Gross profit
General, selling and administrative expenses
Other operating income and expenses, net
Operating profit
Finance income
Finance costs
Foreign exchange (loss)/gain
Profit before income tax
Income tax expense
Profit/(loss) for the year
Other comprehensive loss
Note
9
10
11
13
13
14
15
2017
2016
177 454 848
175 470 671
(137 010 445)
(135 261 292)
40 444 403
40 209 379
(36 189 311)
(35 764 206)
3 335 349
7 590 441
114 239
(1 050 739)
3 394 434
281 631
(3 532 915)
(3 550 403)
(376 375)
3 795 390
(628 477)
3 166 913
145 973
271 635
(409 425)
(137 790)
Items that will never be reclassified to profit or loss
Exchange differences on translating to presentation currency
(80 668)
(118 246)
Items that are or may be reclassified subsequently to profit or loss
Change in fair value of hedges and reclassification from hedging reserve
13
(30 665)
Other comprehensive income
Income tax on other comprehensive income
13, 15
Other comprehensive loss for the year, net of income tax
Total comprehensive income/(loss) for the year
Earnings/(loss) per share
-
6 133
(105 200)
3 061 713
79 428
(170 999)
(15 885)
(225 702)
(363 492)
Basic and diluted earnings/(loss) per share (RUB)
27
11.8
(0.5)
Consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming part of, the consolidated
financial statements set out on pages 76 to 111.
Annual Report 2017
FINANCIAL STATEMENTS
78
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2017
’000 RUB
Note
Share
capital
Legal
reserve
Additional
paid-in
capital
Hedging
reserve
Retained
earnings
Translation
reserve
Total equity
Balance at 1 January 2016
119 440
10 597
8 903 606
(138 872)
14 757 649
838 547
24 490 967
Total comprehensive income
for the year
Loss for the year
Other comprehensive income
Foreign currency translation
differences
Change in fair value of hedges
and reclassification from hedging
reserve
Income tax on other
comprehensive income
Other comprehensive income
Total other comprehensive loss
Total comprehensive loss
for the year
Transactions with owners,
recorded directly in equity
Contributions by
and distributions to owners
13
15
Dividends paid
26
Total contributions by
and distributions to owners
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(137 790)
-
(137 790)
-
-
79 428
(15 885)
-
-
-
-
-
-
-
-
-
-
(118 246)
(118 246)
-
-
-
79 428
(15 885)
(170 999)
-
(170 999)
63 543
(170 999)
(118 246)
(225 702)
63 543
(308 789)
(118 246)
(363 492)
(347 949)
(347 949)
-
-
(1 124 462)
(1 124 462)
-
-
(1 472 411)
(1 472 411)
Balance at 31 December 2016
119 440
10 597
8 555 657
(75 329)
13 324 398
720 301
22 655 064
The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set
out on pages 76 to 111.
O’KEY Group of Companies CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2017
79
’000 RUB
Note
Share
capital
Legal
reserve
Additional
paid-in
capital
Hedging
reserve
Retained
earnings
Translation
reserve
Total equity
Balance at 1 January 2017
119 440
10 597
8 555 657
(75 329)
13 324 398
720 301
22 655 064
Total comprehensive income
for the year
Profit for the year
Other comprehensive income
Foreign currency translation
differences
Change in fair value of hedges
and reclassification from hedging
reserve
Income tax on other
comprehensive income
Total other comprehensive loss
Total comprehensive income
for the year
Transactions with owners,
recorded directly in equity
Contributions by
and distributions to owners
13
15
Dividends paid
26
Total contributions by
and distributions to owners
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(30 665)
6 133
(24 532)
3 166 913
-
3 166 913
-
-
-
-
(80 668)
(80 668)
-
-
(30 665)
6 133
(80 668)
(105 200)
(24 532)
3 166 913
(80 668)
3 061 713
-
-
(1 465 798)
(1 465 798)
-
-
(1 465 798)
(1 465 798)
Balance at 31 December 2017
119 440
10 597
8 555 657
(99 861)
15 025 513
639 633
24 250 979
The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set
out on pages 76 to 111.
Annual Report 2017 FINANCIAL STATEMENTS
80
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 2017
’000 RUB
Cash flows from operating activities
Cash receipts from customers
Other cash receipts
Interest received
Cash paid to suppliers and employees
Operating taxes
Other cash payments
VAT paid
Income tax paid
Net cash from operating activities
Cash flows from investing activities
2017
2016
202 566 776
199 801 345
497 880
104 391
684 044
257 541
(194 385 579)
(186 678 063)
(672 429)
(125 740)
(2 182 232)
(928 829)
4 874 238
(670 313)
(76 312)
(1 485 904)
(159 780)
11 672 558
Purchase of property, plant and equipment and lease rights (excluding VAT)
(3 112 061)
(5 880 420)
Purchase of other intangible assets (excluding VAT)
Proceeds from sales of property, plant and equipment and intangible assets (excluding VAT)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from loans and borrowings
Repayment of loans and borrowings
Interest paid
Dividends paid
Other financial payments
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at end of the year
(439 980)
186 870
(450 701)
917 819
(3 365 171)
(5 413 302)
7 685 500
(7 663 017)
(3 655 488)
(1 465 798)
(88 340)
(5 187 143)
(3 678 076)
11 463 467
(35 214)
7 750 177
24 498 000
(23 480 067)
(3 939 956)
(1 472 411)
(134 577)
(4 529 011)
1 730 245
9 768 130
(34 908)
11 463 467
The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on
pages 76 to 111.
O’KEY Group of Companies Notes to the Consolidated
Financial Statements
for the year ended
31 December 2017
81
1 REPORTING ENTITY
(a) Organisation and operations
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRSs”) as adopted by the European Union for the year ended 31 December 2017 for O’Key Group S.A.
and its subsidiaries (together referred to as the “Group”).
The Company was incorporated and is domiciled in Luxembourg. The Company was set up in accordance with
Luxembourg regulations. The main part of the Group is located and conducts its business in the Russian Federation.
As at 31 December 2017 the Company considers as its major shareholders: Mr. Troitskii, Mr. Volchek and Mr. Korzhev.
As at 31 December 2017 the Company’s shares are listed on the London Stock Exchange in the form of Global
Depositary Receipts (GDRs).
Related party transactions are detailed in note 34.
The Company’s registered address is: Luxembourg 46a, Avenue J.F. Kennedy, 3rd floor, L-1855.
The Group’s principal business activity is the operation of a retail chain in Russia under the brand name “O’KEY”.
At 31 December 2017 the Group operated 149 stores including 67 discounter stores (31 December 2016: 164 stores
including 54 discounter stores) in major Russian cities, including but not limited to Moscow, St.Petersburg, Murmansk,
Nizhniy Novgorod, Rostov-on-Don, Krasnodar, Lipetsk, Volgograd, Ekaterinburg, Novosibirsk, Krasnoyarsk, Ufa,
Astrakhan and Surgut.
(b) Business environment
The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed
to the economic and financial markets of the Russian Federation which display characteristics of an emerging market.
The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent
changes which together with other legal and fiscal impediments contribute to the challenges faced by entities
operating in the Russian Federation.
The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States
of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has
resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble,
a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit.
In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets
and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects
of implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine.
The consolidated financial statements reflect management’s assessment of the impact of the Russian business
environment on the operations and the financial position of the Group. The future business environment may differ
from management’s assessment.
Annual Report 2017 FINANCIAL STATEMENTS
82
2 BASIS OF ACCOUNTING
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRSs”) as adopted by the European Union and were authorised for issue by the Board of Directors on 26 March 2018.
3 FUNCTIONAL AND PRESENTATION CURRENCY
Items included in the financial statements of each of the Group’s entities are measured using the currency
of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated
financial statements are presented in Russian Roubles. All financial information presented in RUB has been rounded
to the nearest thousand, except when otherwise indicated. Functional currency of the Company is USD and functional
currency of Russian subsidiaries is RUB.
The results and financial position of the Group entities, which functional currencies are different from Russian Roubles,
are translated into the presentation currency as follows:
» assets and liabilities for each statement of financial position presented are translated at the closing rate of the year end;
» profit and loss items for each statement of profit and loss and other comprehensive income are translated at the date
of transaction;
» all resulting exchange differences are recognised as translation reserve in equity.
At 31 December 2017 the principal rate of exchange used for translating foreign currency balances were USD 1 =
RUB 57.6002; EUR 1 = RUB 68.8668 (2016: USD 1 = RUB 60.6569; EUR 1 = RUB 63.8111).
4 USE OF ESTIMATES AND JUDGMENTS
The preparation of consolidated financial statements in conformity with IFRSs requires management to make
judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts
of assets, liabilities, income and expenses. Actual results may differ from those estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimates are revised and in any future periods affected.
Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements
and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next
financial year include:
Tax legislation. The Group is subject to income taxes in several jurisdictions. Significant judgment is required
in determining the provision for income taxes. The major part of the tax burden refers to Russian tax, currency
and customs legislation, which is subject to varying interpretations. Refer to note 33.
Bonuses from suppliers. The Group receives various bonuses from suppliers which represent a significant reduction
in cost of sales and inventory cost. The calculation of these amounts is in part dependent on an estimation of whether
the amounts due under agreements with suppliers have been earned at the reporting date based on inventory
purchased and other conditions. The process for calculating and recording supplier bonuses involves significant
manual processes which are more susceptible to error. Furthermore, the allocation of the bonuses to inventory cost
also has some element of judgement.
Determination of recoverable amount of property, plant and equipment. For those stores, where impairment
indicators exist as at reporting date, the Group estimates recoverable amount being higher of its value in use and fair
value less cost of disposal.
For details of impairment testing performed as at 31 December 2017 refer to note 17.
Recoverability of deferred tax asset. Significant judgment is required in assessment of recoverability of deferred tax assets
on tax losses. The Group performs analysis of future taxable profit to cover the accumulated tax losses. Refer to note 20.
Sale of O’key Supermarkets business. In December 2017 the Group signed a framework agreement with X5 Retail
Group for sale of the major part of supermarkets business. Significant judgment is required in determination of amount
and timing of recognition of proceeds under the agreement. For details refer to note 8.
O’KEY Group of Companies 5 DETERMINATION OF FAIR VALUES
83
A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial
and non-financial assets and liabilities.
When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair
values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques
as follows.
» Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
» Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e.
as prices) or indirectly (i.e. derived from prices).
» Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair
value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy
as the lowest level input that is significant to the entire measurement.
The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during
which the change has occurred.
Fair values have been determined for measurement and for disclosure purposes based on the following methods.
When applicable, further information about the assumptions made in determining fair values is disclosed in the notes
specific to that asset or liability.
(a) Investment property
An external, independent valuation company, having appropriate recognised professional qualifications and recent
experience in the location and category of property being valued, values the Group’s investment property every year.
The fair values are based on market values, being the estimated amount for which a property could be exchanged
on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after proper
marketing wherein the parties had each acted knowledgeably and willingly.
Appraisers considered current prices in an active market. The appraisers used the income approach for determining
the fair value.
Valuations reflect, when appropriate, the type of tenants actually in occupation or responsible for meeting lease
commitments or likely to be in occupation after letting vacant accommodation and the allocation of maintenance
and insurance responsibilities between the Group and the lessee.
(b) Non-derivative financial assets
The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted
at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes.
(c) Derivatives
The fair value of interest rate swaps is estimated by discounting estimated future cash flows based on the terms
and maturity of each contract and using market interest rates for a similar instrument at the measurement date.
Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk
of the Group entity and counterparty when appropriate.
(d) Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal
and interest cash flows, discounted at the market rate of interest at the reporting date. Fair value of bonds payable was
determined for disclosure purposes based on active market quotations (Level 1 fair value).
Annual Report 2017 FINANCIAL STATEMENTS
84
6 OPERATING SEGMENTS
The Group is engaged in management of retail stores located in Russia. Although the Group is not exposed
to concentration of sales to individual customers, all the Group’s sales are in the Russian Federation. As such,
the Group is exposed to the economic development in Russia, including the development of the Russian retail industry.
The Group has no significant non-current assets outside the Russian Federation.
The Group identified its operating segments in accordance with the criteria set in IFRS 8 Operating Segments
and based on the way the operations of the Group are regularly reviewed by the chief operating decision maker
to analyse performance and allocate resources within the Group.
The Group’s chief operating decision maker has been determined as the CEO.
The Group has two reportable segments: O’Key and Da!. Each segment has similar format of their stores which is
described below:
» O’Key –chain of modern Western European style hypermarkets under the “O’KEY” brand reinforced by O’KEY
supermarkets throughout Russian Federation;
» Da! – chain of discounter stores in Moscow and Central region.
The assortment of goods in each chain is different, and the segments are managed separately. For each
of the segments, the CEO of the Group reviews internal management reports on at least a monthly basis.
Within each reportable segment all business components demonstrate similar characteristics:
» the products and customers;
» the business processes are integrated and uniform: the components manage their operations centrally. Purchasing,
logistics, finance, HR and IT functions are centralised;
» the components’ activities are mainly limited to Russia which has a uniform regulatory environment.
The CEO assesses the performance of the operating segment based on earnings before interest, tax, depreciation
and amortisation (EBITDA) adjusted for one-off items. Term EBITDA is not defined in IFRS. Other information provided
to the CEO is measured in a manner consistent with that in the consolidated financial statements. The accounting
policies used for the segment reporting are the same as accounting policies applied for the consolidated financial
statements as described in note 37.
The segment information for the year ended 31 December 2017 is as follows:
’000 RUB
O’Key
Da!
Total
2017
2016
2017
2016
2017
2016
External revenue
167 062 312
169 695 802
10 392 536
5 774 869
177 454 848
175 470 671
Inter-segment revenue
-
-
-
30 274
-
30 274
EBITDA
11 358 589
11 845 435
(2 023 596)
(2 592 229)
9 334 993
9 253 206
O’KEY Group of Companies A reconciliation of EBITDA to profit/(loss) for the year is as follows:
85
’000 RUB
EBITDA
Revaluation of investment property
Gain/(loss) from disposal of non-current assets
Impairment of non-current assets
Loss from write-off of receivables
Impairment of receivables
Depreciation and amortisation
Finance income
Finance costs
Foreign exchange loss/(gain)
Other expenses
Profit before income tax
Income tax expense
Profit/(loss) for the year
7 SUBSIDIARIES
Note
11
11
11
11
11
10
13
13
14
2017
9 334 993
(200 000)
3 905 402
(279 174)
(436 256)
(3 626)
2016
9 253 206
(27 055)
(568 004)
(434 370)
(279 015)
(395)
(4 613 172)
(4 549 933)
114 239
281 631
(3 532 915)
(3 550 403)
(376 375)
(117 726)
3 795 390
(628 477)
3 166 913
145 973
-
271 635
(409 425)
(137 790)
Details of the Company’s significant subsidiaries at 31 December 2017 and 31 December 2016 are as follows:
Country of incorporation
Nature of operations
Ownership/voting
Ownership/voting
2017
2016
Subsidiary
LLC O’Key
JSC Dorinda
Russian Federation
Russian Federation
Retail
Real estate
LLC O’Key Group
Russian Federation
Managing Company
LLC O’Key Logistics
Russian Federation
Import operations
LLC Fresh Market
Russian Federation
Retail and real estate
8 SALE OF SUPERMARKETS
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
In December 2017 the Group signed a framework agreement with X5 Retail Group for sale of the major part of
supermarkets business comprising of 32 stores. The agreement comprises a series of transactions. Total expected
proceeds according to the agreement are RUB 7 222 176 thousand. Having considered terms of the agreement, the
Group concluded that in substance control over 28 of 32 stores was transferred to the buyer in December 2017 and
recognized in 2017 respective proceeds in the amount of RUB 6 677 176 thousand. Assets attributable to disposed part
of business mainly comprise land and buildings, equipment, lease rights and short-term receivables. Net book value of
the assets attributable to the disposed part of business amounted to RUB 2 031 973 thousand.
The sale of remaining part of supermarket business which consists of 4 stores is expected within 12 months after the
reporting date. As a result, trading equipment and lease rights of these stores are presented as non-current assets held
for sale in the consolidated statement of financial position as at 31 December 2017 (see note 24).
Annual Report 2017 FINANCIAL STATEMENTS
86
9 REVENUE
’000 RUB
Sales of trading stock
Sales of self-produced catering products
Revenue from sale of goods
Rental income
Revenue from advertising services
Total revenues
2017
2016
167 314 837
165 210 286
7 022 505
7 269 694
174 337 342
172 479 980
1 738 525
1 378 981
1 620 671
1 370 020
177 454 848
175 470 671
Total revenues comprise sale of goods, rental income from tenants, which rent trade area in the Group stores
and income from placing advertising in the Group stores.
10 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES
’000 RUB
Personnel costs
Operating leases
Depreciation and amortisation
Communication and utilities
Advertising and marketing
Repairs and maintenance costs
Security expenses
Insurance and bank commission
Operating taxes
Legal and professional expenses
Materials and supplies
Other costs
Note
12
31
17, 18, 19
2017
2016
(15 619 123)
(16 185 073)
(5 757 744)
(4 613 172)
(3 525 377)
(2 115 888)
(1 253 737)
(869 282)
(818 668)
(730 401)
(520 419)
(329 541)
(35 959)
(5 343 910)
(4 549 933)
(3 485 840)
(1 795 089)
(1 182 822)
(825 314)
(737 305)
(713 223)
(602 704)
(301 595)
(41 398)
(36 189 311)
(35 764 206)
Fees billed to the Company and its subsidiaries by KPMG Luxembourg Societe coopérative, and other member firms
of the KPMG network during the year are as follows:
’000 RUB
Auditors’ remuneration for annual and consolidated accounts
Auditors’ remuneration for other assurance services
Auditors’ remuneration for tax advisory services
2017
12 988
4 259
2 458
19 705
2016
13 902
4 721
115
18 738
O’KEY Group of Companies 11 OTHER OPERATING INCOME AND EXPENSES, NET
87
’000 RUB
Gain/(loss) from disposal of non-current assets
Impairment of non-current assets
Loss from write-off of receivables
Impairment of receivables
Loss from revaluation of investment property
Sundry income and expense, net
Note
17, 18
16
2017
3 905 402
(279 174)
(436 256)
(3 625)
(200 000)
349 002
3 335 349
2016
(568 004)
(434 370)
(279 015)
(395)
(27 055)
258 100
(1 050 739)
Gain from disposal of non-current assets amounted RUB 3 905 402 thousand is mainly represented by gain on sale of
supermarkets business in the amount of RUB 4 645 203 thousand, described in note 8.
In 2016 loss from disposal of other non-current assets amounted RUB 568 004 thousand relating to stores and land
plots in Moscow and other regions which the Group closed or disposed of during the year.
12 PERSONNEL COSTS
’000 RUB
Wages and salaries
Social security contributions
Employee benefits
Other personnel costs
Total personnel costs
2017
2016
(10 263 659)
(10 706 956)
(3 236 031)
(1 093 169)
(1 026 264)
(3 352 398)
(1 100 248)
(1 025 471)
(15 619 123)
(16 185 073)
During the year ended 31 December 2017 the Group employed 23 thousand employees on average (2016: 25 thousand
employees on average). Approximately 94% of employees are store and warehouse employees and the remaining part
is office employees.
Annual Report 2017 FINANCIAL STATEMENTS
88
13 FINANCE INCOME AND FINANCE COSTS
’000 RUB
Recognised in profit or loss
Interest income on loans, receivables and bank deposits
Other finance income
Finance income
Interest costs on loans and borrowings
Reclassification from hedging reserve
Finance costs
Net finance costs recognised in profit or loss
The above financial income and costs include the following in respect for assets/(liabilities) not
at fair value through profit and loss:
Total interest income on financial assets
Total interest expense on financial liabilities
’000 RUB
Recognised in other comprehensive income
Change in fair value of hedges
Income tax on income and expense recognised in other comprehensive income
Finance income/(costs) recognised in other comprehensive income, net of tax
2017
2016
113 467
772
114 239
264 891
16 740
281 631
(3 585 772)
(3 497 546)
52 857
(3 532 915)
(3 418 676)
(52 857)
(3 550 403)
(3 268 772)
114 239
281 631
(3 532 915)
(3 550 403)
2017
2016
(30 665)
6 133
(24 532)
79 428
(15 885)
63 543
During 2017 the Group has capitalised interests in the value of property, plant and equipment. The amount
of capitalised interest comprised RUB 243 571 thousand (2016: RUB 492 704 thousand).
In 2017, a capitalisation rate of 10.11% was used to determine the amount of borrowing costs eligible for capitalisation
(2016: 11.24 %).
14 FOREIGN EXCHANGE (LOSS)/GAIN
During 2017 the Russian Rouble significantly fluctuated against the USD. Net foreign exchange loss recognised
in profit and loss in the amount of RUB 376 375 thousand for the year ended 31 December 2017 (2016: loss
RUB 145 973 thousand) mainly relates to USD-denominated payables. In 2017, the Group has not used hedging
instruments to hedge foreign exchange risks.
The Group’s risk management policy is to receive borrowings in the same currency which generated revenue (Russian
Rouble). As at 31 December 2017, the share of USD-denominated borrowings in Group’s debt was not significant.
The Group’s exposure to currency risk is disclosed in note 30.
15 INCOME TAX EXPENSE
The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2016: 20%).
’000 RUB
Current tax expense
Deferred tax benefit
Total income tax expense
2017
2016
(1 065 737)
(1 182 854)
437 260
(628 477)
773 429
(409 425)
O’KEY Group of Companies
Income tax recognised directly in other comprehensive income
89
’000 RUB
2017
2016
Foreign currency translation
differences
Change in fair
value of hedges
and reclassification from
hedging reserve
Before tax
(80 668)
Tax
-
Net of tax
Before tax
(80 668)
(118 246)
Tax
-
Net of tax
(118 246)
(30 665)
6 133
(24 532)
79 428
(15 885)
63 543
(111 333)
6 133
(105 200)
(38 818)
(15 885)
(54 703)
Reconciliation of effective tax rate:
’000 RUB
Profit before income tax
Income tax at applicable tax rate (2017: 20%, 2016: 20%)
Effect of income taxed at different rates
Tax effect of items which are not deductible for taxation purposes:
- Inventory shrinkage expenses
- Other non-deductible expenses
Tax withheld on dividends received from subsidiaries
Adjustments to current income tax for previous periods
Other items
Income tax (expense)/benefit for the year
2017
3 795 390
(759 083)
649 935
(97 870)
(91 096)
(150 966)
(197 370)
17 973
(628 477)
2016
271 635
(54 327)
(33 110)
(94 522)
(101 470)
(143 415)
7 601
9 818
(409 425)
The amount of income tax reimbursed for previous years was recognised as reduction of income tax expense
and relates to expenses, which the Group treats as deductible since 2014.
16 INVESTMENT PROPERTY
(a) Reconciliation of carrying amount
’000 RUB
Investment properties at fair value as at 1 January 2016
Expenditure on subsequent improvements
Fair value loss (unrealised)
Investment properties at fair value as at 31 December 2016
Investment properties at fair value as at 1 January 2017
Transfer from Property, plant and equipment
Fair value loss (unrealised)
Investment properties at fair value as at 31 December 2017
Investment
property
564 000
35 597
(27 055)
572 542
572 542
702 468
(200 000)
1 075 010
11
17
During the year ended 31 December 2017 the Group transferred from property, plant and equipment to investment
two buildings that were previously own-used and now held to earn rental income. As at 31 December 2017 Group’s
investment property comprises three buildings.
Annual Report 2017
FINANCIAL STATEMENTS
90
(b) Measurement of fair value
For one building with carrying amount of RUB 181 850 thousand as at 31 December 2017 the Group determined fair
value using market approach based on most recent quoted prices.
For two remaining buildings the carrying amount of RUB 893 160 thousand as at 31 December 2017 is the fair value
as determined by registered independent appraisers having an appropriate recognised professional qualification
and recent experience in the location and type of the property being valued.
The appraisers used income approach for determining the fair value. Under income approach an estimate of annual
net operating income was made which is mainly based on annual net rent rate of RUB 5 387 – 8 467 per sq. m. (2016:
RUB 7 000 per sq. m.) and expected occupancy of 30% – 95% (2016: 93%) during the first year and 95-98% during
following years. Discount rate of 13.7-14.4% (2016: 13%) was applied to discount future cash flows.
The fair value measurement of investment property has been categorised as a Level 2 (market approach) and Level 3
(income approach) fair value based on the inputs to the valuation technique used (see note 5).
17 PROPERTY, PLANT AND EQUIPMENT
’000 RUB
Land
Buildings
Leasehold
improvements
Machinery
and equipment, auxiliary
facilities and other fixed
assets
Construction
in progress
Total
Cost or deemed cost
Balance at 1 January 2016
4 839 188
32 413 643
6 918 148
14 346 880
6 694 671
65 212 530
Additions
Transfers
61 050
1 330 346
-
2 044 418
3 558 131
6 993 945
-
4 867 621
1 182 516
497 253
(6 547 390)
-
Transfers from Lease rights
Disposals
127 317
(6 079)
-
(9 375)
Balance at 31 December 2016
5 021 476
38 602 235
-
(393 091)
7 707 573
-
-
127 317
(1 343 184)
(219 533)
(1 971 262)
15 545 367
3 485 879
70 362 530
’000 RUB
Land
Buildings
Leasehold
improvements
Machinery
and equipment, auxiliary
facilities and other fixed
assets
Construction
in progress
Total
Balance at 1 January 2017
5 021 476
38 602 235
7 707 573
15 545 367
3 485 879
70 362 530
Additions
Transfers
Classified as asset held for sale
Transfer to Investment
property
53 106
10 539
-
-
-
2 113 770
-
(1 114 282)
-
633 431
(144 151)
-
998 789
2 820 278
3 882 712
204 107
(2 951 308)
-
(312 305)
-
-
-
(456 456)
(1 114 282)
Disposals
(140 106)
(1 605 877)
(887 694)
(1 507 618)
(41 674)
(4 182 969)
Balance at 31 December 2017
4 934 476
38 006 385
7 309 159
14 928 340
3 313 175
68 491 535
Depreciation and impairment
losses
Balance at 1 January 2016
Depreciation for the year
Impairment losses
Disposals
Balance at 31 December 2016
-
-
-
-
-
(4 650 025)
(1 839 374)
(1 181 577)
(606 709)
(434 370)
-
31
80 095
(6 265 941)
(2 365 988)
(8 940 398)
(2 344 466)
-
1 282 010
(10 002 854)
-
-
-
-
-
(15 429 797)
(4 132 752)
(434 370)
1 362 136
(18 634 783)
O’KEY Group of Companies ’000 RUB
Land
Buildings
Leasehold
improvements
Machinery
and equipment, auxiliary
facilities and other fixed
assets
Construction
in progress
Total
91
Balance at 1 January 2017
Depreciation for the year
Impairment losses
Classified as assets held
for sale
Transfer to Investment
property
Disposals
Balance at 31 December 2017
-
-
-
-
-
-
-
(6 265 941)
(2 365 988)
(1 316 609)
(647 413)
(271 640)
-
(7 534)
43 657
(10 002 854)
(2 156 386)
-
219 192
411 814
-
-
420 398
411 590
(7 021 978)
(2 565 688)
1 313 489
(10 626 559)
-
-
-
-
-
-
-
(18 634 783)
(4 120 408)
(279 174)
262 849
411 814
2 145 477
(20 214 225)
Carrying amounts
At 1 January 2016
4 839 188
27 763 618
At 31 December 2016
5 021 476
32 336 294
At 31 December 2017
4 934 476
30 984 407
5 078 774
5 341 585
4 743 471
5 406 482
6 694 671
49 782 733
5 542 513
3 485 879
51 727 747
4 301 781
3 313 175
48 277 310
Depreciation expense of RUB 4 120 408 thousand has been charged to selling, general and administrative expenses
(2016: RUB 4 132 752 thousand).
During the year ended 31 December 2017 the Group transferred two buildings from Property, plant and equipment to
Investment property following change in use of these properties. Before transfer to investment property, the Group
performed impairment test for these buildings are recognised impairment loss in the amount of RUB 149 877 thousand.
As at 31 December 2017 the Group performed impairment test for low-performing stores and recognised an
impairment loss of RUB 129 297 thousand (2016: RUB 434 370 thousand).
As at 31 December 2017 the Group determined recoverable amount of the stores being their value in use. Recoverable
amount of the stores amounted to RUB 200 800 thousand and impairment loss amounted to RUB 73 116 thousand.
Discount rate of 13.9% was applied to discount future cash flows.
Security
At 31 December 2017, 4 stores have been pledged to third parties as collateral for bank borrowings (2016: 4 stores).
Refer to notes 28 and 33.
18 LEASE RIGHTS
Leasehold rights consist of initial cost of land lease and premises. Lease rights include purchase price and costs directly
attributable to the acquisition of lease rights for land plots and premises.
Lease rights are amortised over the period of the lease: 49-51 years for land leases and 8-19 years for leases
of premises.
Annual Report 2017
FINANCIAL STATEMENTS
92
Movements in the carrying amount of lease rights were as follows:
’000 RUB
Cost
Balance at 1 January
Additions
Transfers to land
Disposals
Balance at 31 December
Amortisation and impairment losses
Balance at 1 January
Amortisation charge
Transfers to land
Disposals
Balance at 31 December
Net book value
2017
2016
6 024 760
107 695
-
(259 698)
5 872 757
6 287 181
36 000
(140 565)
(157 856)
6 024 760
(1 446 225)
(1 439 644)
(144 140)
-
155 464
(174 640)
13 248
154 811
(1 434 901)
(1 446 225)
4 437 856
4 578 535
Amortisation of RUB 144 140 thousand has been charged to selling, general and administrative expenses (2016:
RUB 174 640 thousand).
19 INTANGIBLE ASSETS
’000 RUB
Cost
Balance at 1 January 2016
Additions
Disposals
Balance at 31 December 2016
Balance at 1 January 2017
Additions
Disposals
Balance at 31 December 2017
Amortisation and impairment losses
Balance at 1 January 2016
Amortisation for the year
Disposals
Balance at 31 December 2016
Balance at 1 January 2017
Amortisation for the year
Disposals
Balance at 31 December 2017
Carrying amounts
At 1 January 2016
At 31 December 2016
At 31 December 2017
Software Other intangible assets
Total
1 093 006
476 499
(160 307)
1 409 198
1 409 198
499 154
(168 723)
1 739 629
(558 077)
(220 700)
160 252
(618 525)
(618 525)
(323 022)
40 435
(901 112)
534 929
790 673
838 517
128 156
1 221 162
24 677
(4 424)
501 176
(164 731)
148 409
1 557 607
148 409
1 557 607
46 676
(4 359)
545 830
(173 082)
190 726
1 930 355
(28 027)
(21 841)
3 889
(586 104)
(242 541)
164 141
(45 979)
(664 504)
(45 979)
(25 602)
3 446
(664 504)
(348 624)
43 881
(68 135)
(969 247)
100 129
635 058
102 430
123 591
893 103
961 108
O’KEY Group of Companies
Amortisation and impairment losses
93
Amortisation of RUB 348 624 thousand has been charged to selling, general and administrative expenses (2016:
RUB 242 541 thousand).
20 DEFERRED TAX ASSETS AND LIABILITIES
(a) Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
’000 RUB
Assets
2017
69 975
268 721
-
-
-
Investment property
Property, plant
and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables
and payables
2016
994
Liabilities
2017
-
2016
-
Net
2017
69 975
2016
994
173 210
(893 233)
(974 315)
(624 512)
(801 105)
-
-
-
(261 521)
(94 649)
(102 825)
-
(267 198)
(126 179)
(101 467)
(1 510)
(261 521)
(94 649)
(102 825)
500 080
(575 124)
(577 189)
(280 970)
500 080
294 154
602 017
615 767
Long-term investments
6 613
6 613
Tax loss carry-forwards
1 816 384
1 234 439
-
-
-
-
Tax assets/(liabilities)
2 955 927
2 633 040
(1 927 352)
(2 047 858)
Set off of tax
(1 038 355)
(1 355 767)
Net tax assets/(liabilities)
1 917 572
1 277 273
1 038 355
(888 997)
1 355 767
(692 091)
6 613
1 816 384
1 028 575
-
1 028 575
585 182
(b) Unrecognised deferred tax liability
As at 31 December 2017 a temporary difference of RUB 23 909 664 thousand (2016: RUB 23 979 879 thousand)
relating to investments in subsidiaries has not been recognised as the Group is able to control the timing of reversal
of the difference, and reversal is not expected in the foreseeable future. If the temporary difference was reversed
in form of distributions remitted to the Company, then an enacted tax rate of 5-15% would apply.
(c) Recognised deferred tax asset on tax loss carried forward
Deferred tax asset recognised in respect of tax loss carried forward relates to losses accumulated by Group’s subsidiary
LLC Fresh Market that develops a discounter chain and does not yet generate profit. Russian tax legislation does not
limit the period into which a tax loss can be carried forward.
The Group determined that future taxable profits will be available in foreseeable future against which accumulated
losses can be utilised. In making this assessment the Group considered that according to the discounter chain’s long-
term budget tax losses accumulated as at 31 December 2017 will be utilised within 6 years after reporting date.
(267 198)
(126 179)
(101 467)
600 507
38 578
6 613
1 234 439
585 182
-
Annual Report 2017 FINANCIAL STATEMENTS
94
(d) Movement in temporary differences during the year
’000 RUB
Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables and payables
Long-term investments
Tax loss carry-forwards
’000 RUB
Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables and payables
Long-term investments
Tax loss carry-forwards
1 January 2017
Recognised
in profit or loss
Recognised
in other
comprehensive
income
31 December
2017
994
(801 105)
(267 198)
(126 179)
(101 467)
600 507
38 578
6 613
1 234 439
585 182
68 981
176 593
5 677
31 530
(1 358)
(100 427)
(325 681)
-
581 945
437 260
-
-
-
-
-
-
69 975
(624 512)
(261 521)
(94 649)
(102 825)
500 080
6 133
(280 970)
-
-
6 133
6 613
1 816 384
1 028 575
1 January 2016
Recognised
in profit or loss
Recognised
in other
comprehensive
income
31 December
2016
(1 113)
(565 250)
(210 954)
(95 313)
(118 434)
542 909
(261 414)
-
537 207
(172 362)
2 107
(235 855)
(56 244)
(30 866)
16 967
57 598
315 877
6 613
697 232
773 429
-
-
-
-
-
-
(15 885)
-
-
(15 885)
2017
906 496
613 421
297 535
994
(801 105)
(267 198)
(126 179)
(101 467)
600 507
38 578
6 613
1 234 439
585 182
2016
894 175
769 210
339 295
1 817 452
2 002 680
21 OTHER NON‑CURRENT ASSETS
’000 RUB
Long-term prepayments to entities under control of shareholder group
Prepayments for property plant and equipment
Long-term deposits to lessors
Long-term prepayments to entities under control of the shareholder group represent prepayments for rent
of hypermarkets for the period until 2034. Related party transactions are detailed in note 34.
O’KEY Group of Companies
22 INVENTORIES
’000 RUB
Goods for resale
Raw materials and consumables
Write-down to net realisable value
95
2017
2016
13 261 136
13 370 212
671 255
(408 155)
700 673
(364 017)
13 524 236
13 706 868
The Group tested the stock for obsolescence and wrote down the inventories to their net realisable value, which
resulted in a decrease of the carrying value of stock by RUB 408 155 thousand as at 31 December 2017 (2016:
RUB 364 017 thousand). The write down to net realisable value was determined applying the percentages of discount
on sales and write-offs of slow moving goods to the appropriate ageing of the goods. The percentages of discount
were based on the management’s best estimate following the experience of the discount sales.
The write-down is included in cost of goods sold.
23 TRADE AND OTHER RECEIVABLES
’000 RUB
Trade receivables
VAT receivable
Prepaid taxes other than income tax
Prepaid income tax
Bonuses receivable from suppliers
Other receivables
Receivable from sale of supermarkets
2017
449 882
376 414
179 532
46 814
1 732 884
818 629
6 671 686
2016
545 464
1 562 138
132 565
14 282
3 081 243
535 318
-
10 275 841
5 871 010
The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are
disclosed in note 30.
24 NON‑CURRENT ASSETS HELD FOR SALE
’000 RUB
Balance at 1 January 2017
Transfer to assets held for sale
Disposals
Balance at 31 December 2017
Leasehold
improvements
-
100 493
-
100 493
Equipment
Total
-
93 114
(64 018)
29 096
-
193 607
(64 018)
129 589
Non-current assets held for sale represent property, plant and equipment of 4 supermarkets that will be disposed
in 2018 (see note 8). These assets are measured at net book value which is lower than their fair value less costs to sell.
The fair value measurement for assets held for sale has been categorised as a Level 2 fair value measurement and is
based on the prices in the agreement with the buyer.
Annual Report 2017 FINANCIAL STATEMENTS
96
25 CASH AND CASH EQUIVALENTS
’000 RUB
Cash on hand
Bank current account
Term deposits
Cash in transit
Cash and cash equivalents
2017
235 348
1 203 654
4 145 533
2 165 642
7 750 177
2016
417 766
589 988
8 240 763
2 214 950
11 463 467
Term deposits had original maturities of less than three months.
The Group keeps its deposits in the following banks: VTB bank, Saint-Petersburg bank, Unicredit bank, BNP Paribas.
The Group’s exposure to credit and currency risks related to cash and cash equivalents is disclosed in note 30.
26 EQUITY
Reconciliation of number of shares from 1 January to 31 December is provided in the table below.
Number of shares unless otherwise stated
Par value
On issue at 1 January
On issue at 31 December, fully paid
Ordinary shares
2017
2016
EUR 0.01
EUR 0.01
269 074 000
269 074 000
269 074 000
269 074 000
As at 31 December 2017 the Group’s subscribed share capital of RUB 119 440 thousand (EUR 2 691 thousand) is
represented by 269 074 000 shares with a par value of 0.01 EUR each.
In accordance with Luxemburg Company Law, the Company is required to transfer a minimum of 5% of its net profits
for each financial year to a legal reserve. This requirement ceases to be necessary once the balance of the legal reserve
reaches 10% of the issued share capital. The legal reserve is not available for distribution to the shareholders. There
were no transfers to legal reserve during 2017 (2016: nil).
In January 2017 the Group paid interim dividends to shareholders in the amount of RUB 1 465 798 thousand (2016:
RUB 1 472 411 thousand). Interim dividends paid were recognised as distribution to owners in the Consolidated
Statement of Changes in Equity.
Dividends per share recognised as distribution to shareholders for the year ended 31 December 2017 amounted
to RUB 5.5 (2016: RUB 5.5).
27 EARNINGS/(LOSS) PER SHARE
The calculation of basic earnings per share at 31 December 2017 was based on the profit attributable to ordinary
shareholders of RUB 3 166 913 thousand (2016: loss RUB 137 790 thousand), and a weighted average number
of ordinary shares outstanding of 269 074 000, calculated as shown below. The Company has no dilutive potential
ordinary shares.
Number of shares
Issued shares at 1 January
Weighted average number of shares for the year ended 31 December
2017
2016
269 074 000
269 074 000
269 074 000
269 074 000
O’KEY Group of Companies 28 LOANS AND BORROWINGS
97
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings,
which are measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign
currency and liquidity risk, see note 30.
’000 RUB
Non-current liabilities
Secured bank loans
Unsecured bank facilities
Unsecured bonds
Unsecured loans from related parties
Current liabilities
Secured bank loans
Unsecured bank facilities
Unsecured bonds
Unsecured loans from related parties
Unsecured loans from third parties
Loans and borrowings
Unsecured bonds interest
Interest accrued on loans
Interest accrued on loans and borrowings
2017
2016
-
2 500 000
19 466 346
23 000 000
5 213 006
-
5 243 118
929 960
24 679 352
31 673 078
1 600 000
3 913 823
5 030 112
883 096
2 850
2 500 000
1 000 000
962 410
-
2 850
11 429 881
4 465 260
213 776
18 121
231 897
146 904
9 966
156 870
11 661 778
4 622 130
As at 31 December 2017 loans and borrowings with carrying value of RUB 1 600 000 thousand were secured by
property, plant and equipment (2016: RUB 5 000 000 thousand). Refer to note 33.
As at 31 December 2017 the Group has RUB 13 800 000 thousand (2016: RUB 15 800 000 thousand) of undrawn,
committed borrowing facilities available in respect of which all conditions present had been met. Proceeds from these
facilities may be used to finance operating and investing activities, if necessary.
(a) Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
’000 RUB
31 December 2017
31 December 2016
Currency
Year
of maturity
Face value
Carrying
amount
Face value
Carrying
amount
Unsecured bonds
Secured bank facility
Unsecured bank facility
Unsecured loans from
related parties
Unsecured loans from other
companies
RUB
RUB
RUB
USD
RUB
2020 – 2021
10 243 118
10 243 118
6 205 528
6 205 528
2018
1 600 000
1 600 000
5 000 000
5 000 000
2018 – 2021
23 380 169
23 380 169
24 000 000
24 000 000
2021
883 096
883 096
929 960
929 960
2018
2 850
2 850
2 850
2 850
36 109 233
36 109 233
36 138 338
36 138 338
Annual Report 2017
FINANCIAL STATEMENTS
98
Compliance with loan covenants
The Group monitors compliance with loan covenants on an ongoing basis. Where noncompliance is unavoidable
in management’s view, the Group requests waiver letters from the banks before the year-end, confirming that
the banks shall not use its right to demand early redemption.
At 31 December 2017 and during the year then ended the Group complied with all loan covenants.
(b) Reconciliation of movements of liabilities to cash flows arising from financing activities
’000 RUB
Note
Balance at 1 January 2017
Changes from financing cash flows
Proceeds from loans and borrowings
Repayment of loans and borrowings
Interest paid
Dividends paid
Other financial payments
Total changes from financing cash flows
Other changes
Accrued interests
Dividends declared
Reclassification from hedging reserve
Changes in fair value of hedge recognized in
other comprehensive income
Effect of changes in foreign exchange rates
Total other changes
Balance at 31 December 2017
29 TRADE AND OTHER PAYABLES
’000 RUB
Trade payables
Advances received
Taxes payable (other than income tax)
Payables to staff
Deferred income
Interest rate swap liability
Other current payables
Loans and
borrowings
36 295 208
Interest rate
swap liability
147 019
7 685 500
(7 663 017)
(3 655 488)
-
(25 140)
(3 658 145)
26
-
-
-
-
(63 200)
(63 200)
Dividends
payable
-
-
-
-
(1 465 798)
-
Total
36 442 227
7 685 500
(7 663 017)
(3 655 488)
(1 465 798)
(88 340)
(1 465 798)
(5 187 143)
3 766 143
63 200
-
-
1 465 798
-
-
-
(62 076)
3 704 067
36 341 130
(52 857)
30 665
-
41 008
124 827
-
-
-
1 465 798
3 829 343
1 465 798
(52 857)
30 665
(62 076)
5 210 873
-
36 465 957
2017
2016
25 946 694
29 374 499
322 048
990 862
1 216 184
106 275
124 827
147 841
350 816
1 085 381
1 339 925
99 489
147 019
83 763
28 854 731
32 480 892
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 30.
O’KEY Group of Companies
30 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
99
(a) Overview
The Group has exposure to the following risks from its use of financial instruments:
» credit risk;
» liquidity risk;
» market risk.
This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies
and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative
disclosures are included throughout these consolidated financial statements.
Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management
framework.
The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set
appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies are
reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training
and management standards and procedures, aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Group’s Audit Committee oversees how management monitors compliance with the Group’s risk management
policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced
by the Group. The Group’s Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes
both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported
to the Audit Committee.
(b) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet
its contractual obligations, and arises principally from the Group’s receivables from customers, bonuses receivable
and investments.
(i) Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk
at the reporting date was:
’000 RUB
Trade and other receivables
Cash and cash equivalents
Note
Carrying amount
23
25
2017
9 673 081
7 750 177
17 423 258
2016
4 162 025
11 463 467
15 625 492
Due to the fact that the Group’s principal activities are located in the Russian Federation the credit risk is mainly
associated with its domestic market. The credit risks associated with foreign counterparties are considered to be
remote, as there are only few foreign counterparties and they were properly assessed for creditability.
(ii) Trade and other receivables
The Group has no considerable balance of trade receivables because the majority of its customers are retail
consumers, who are not provided with any credit. Therefore the Group’s trade receivables primarily include receivables
from tenants and receivables connected to provision of advertising services. Usually the Group provides advertising
services to suppliers of goods sold in O’Key stores. Thus, the credit risk in part of trade receivables is mostly managed
through procedures for selection of suppliers and tenants.
Annual Report 2017 FINANCIAL STATEMENTS
100
The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade
and other receivables. The main component of this allowance is a specific loss component that relates to individually
significant exposures.
Impairment losses
The aging of trade and other receivables at the reporting date was:
’000 RUB
Gross
2017
Impairment
2017
Not overdue and past due less than 90 days
9 496 464
Past due 90-180 days
Past due 181-360 days
More than 360 days
39 160
63 386
107 974
9 706 984
-
-
-
(33 903)
(33 903)
Gross
2016
4 045 013
43 875
36 658
67 736
4 193 282
Impairment
2016
-
-
-
(31 257)
(31 257)
The movement in the allowance for impairment in respect of trade receivables during the year was as follows:
’000 RUB
Balance at beginning of the year
Impairment loss recognised
Impairment loss reversed
Balance at end of the year
2017
31 257
2 646
-
33 903
2016
29 277
1 980
-
31 257
The management has performed a thorough analysis of the recoverability of the receivables and impaired the balances
outstanding for more than 1 year. Based on past experience management believes that normally the balances
outstanding less than 360 days should not be impaired.
(iii) Cash and cash equivalents
The Group held cash and cash equivalents of RUB 7 750 177 thousand at 31 December 2017 (2016:
RUB 11 463 467 thousand), which represents its maximum credit exposure on these assets. Cash and cash equivalents
are mainly held with banks which are rated from Ba2 to Ba3 based on Moody’s rating.
(c) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial
liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is
to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal
and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
Liquidity risk management is a responsibility of the Treasury under the supervision of the Group’s Financial Director.
The Group’s liquidity risk management objectives are as follows:
» Maintaining financial independence: a share of one creditor in debt portfolio should not exceed 30%;
» Maintaining financial stability: the ratio DEBT/EBITDA should not exceed 4.0;
» Monitoring of compliance with debt covenants;
» Planning: timely preparation of operating, investing and financing cash-flow forecasts on rolling basis.
O’KEY Group of Companies
(i) Exposure to liquidity risk
101
The following are the contractual maturities of financial liabilities, including future interest payments:
2017
’000 RUB
Carrying
amount
Contractual cash
flows
0-6 mths
6-12 mths
1-5 yrs
Non-derivative financial liabilities
Secured bank loan
Unsecured bonds
Unsecured bank facilities
Unsecured loans from related parties
Unsecured loans from other companies
1 600 732
10 457 192
23 397 231
883 096
2 879
(1 702 265)
(415 805)
(1 286 460)
-
(12 556 532)
(753 080)
(5 447 923)
(6 355 529)
(28 089 592)
(2 267 729)
(3 727 947)
(22 093 916)
(900 516)
(900 516)
(2 878)
(2 878)
-
-
-
-
-
-
Trade and other payables
27 435 546
(27 435 546)
(27 435 546)
63 776 676
(70 687 329)
(31 775 554)
(10 462 330)
(28 449 445)
As at 31 December 2017 Group’s current liabilities exceed current assets by RUB 8 545 090 thousand (2016:
RUB 5 892 343 thousand). Excess of current liabilities over current assets is usual for retail industry. The Group uses
excess of trade and other payables over inventory to finance its investing activities.
2016
’000 RUB
Non-derivative financial liabilities
Secured bank loan
Unsecured bonds
Carrying
amount
Contractual cash
flows
0-6 mths
6-12 mths
1-5 yrs
5 001 141
6 352 432
(5 467 111)
(1 445 164)
(1 394 695)
(2 627 252)
(7 574 128)
(1 076 276)
(734 925)
(5 762 927)
Unsecured bank facilities
24 008 799
(31 602 297)
(2 214 692)
(1 202 048)
(28 185 557)
Unsecured loans from related parties
Unsecured loans from other companies
929 960
2 876
(1 010 471)
(2 878)
(37 096)
(2 878)
Trade and other payables
30 945 206
(30 945 206)
(30 945 206)
(37 096)
(936 279)
-
-
-
-
67 240 414
(76 602 091)
(35 721 312)
(3 368 764)
(37 512 015)
In April 2016 the Group placed unsecured bonds on Moscow Exchange in the amount of RUB 5 000 000 thousand.
The bonds mature after 5 years in 2021. However, bond holders have an option to claim repayment after 2.5 years –
in October 2018.
(d) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will
affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is
to manage and control market risk exposures within acceptable parameters, while optimising the return.
The Group buys derivatives in order to manage market risk. All such transactions are carried out within the guidelines set
in Group’s policy on hedging market risk. The Group applies hedge accounting in order to manage volatility in profit or loss.
(i) Currency risk
The Group holds its business in the Russian Federation and mainly collects receivables nominated in Russian Roubles.
However, financial assets and liabilities of the Group are also denominated in other currencies, primarily US Dollar.
Thus the Group is exposed to currency risk, which may materially influence the financial position and financial results
of the Group through the change in carrying value of financial assets and liabilities and amounts on foreign exchange
rate gains or losses. The Group ensures that its exposure is kept to an acceptable level by keeping the proportion
of financial assets and liabilities in foreign currencies to total financial liabilities at an acceptable level. From time to time
the Group converts assets and liabilities from one currency to another. The Group regularly considers the necessity
of using derivatives to hedge its exposure to currency risk.
Annual Report 2017
FINANCIAL STATEMENTS
102
Exposure to currency risk
The Group’s exposure to foreign currency risk was as follows based on notional amounts:
’000 RUB
USD-denominated USD-denominated
Trade and other receivables
Cash and cash equivalents
Unsecured loans from related parties
Trade and other payables
Gross exposure
Net exposure
The following significant exchange rates applied during the year:
2017
2 025
7 853
(883 096)
(439 046)
(1 312 264)
(1 312 264)
2016
1 760
3 582
(929 960)
(176 595)
(1 101 213)
(1 101 213)
Russian Rouble equals
USD
Sensitivity analysis
Average rate
Reporting date rate
2017
58.3529
2016
67.0349
2017
57.6002
2016
60.6569
A 20% weakening of the RUB against USD at 31 December 2017 would have decreased equity and profit and loss
by RUB (262 453) thousand (2016: RUB 220 243 thousand). This analysis is based on foreign currency exchange rate
variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes
that all other variables, in particular interest rates, remain constant. The analysis was performed on the same basis
for 2016.
A strengthening of the RUB against USD at 31 December 2017 would have had the equal but opposite effect on equity
and profit and loss, on the basis that all other variables remain constant.
(ii) Interest rate risk
The Group has material exposure to interest rate risk. As at 31 December 2017, 7% of the Group’s interest bearing
financial liabilities were subject to re-pricing within 6 months after the reporting date (2016: 6%).
The Group uses swap to hedge its exposure to variability of interest rates. As at 31 December 2017 the Group
had interest swap agreement with VTB bank. Under this agreement the Group swaps Mosprime rate for fixed
rate. At inception, the swap had a maturity of three years. As at 31 December 2017 fair value of swap liability was
RUB 124 827 thousand (31 December 2016: RUB 147 018 thousand).
Profile
At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was:
’000 RUB
Fixed rate instruments
Financial assets
Financial liabilities
Variable rate instruments
Financial liabilities
Carrying amount
2017
2016
4 145 533
8 240 763
(28 637 411)
(36 295 208)
(7 703 719)
-
O’KEY Group of Companies Cash flow sensitivity analysis for variable rate instruments
103
A change of 500 basis points in interest rates at the reporting date would have increased (decreased) equity and profit
or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates,
remain constant. The analysis was performed on the same basis for 2016.
’000 RUB
2017
Variable rate instruments
Interest rate swap
Cash flow sensitivity (net)
2016
Variable rate instruments
Interest rate swap
Cash flow sensitivity (net)
Profit or loss
Equity
500 bp
increase
500 bp
decrease
500 bp
increase
500 bp
decrease
(385 000)
75 000
(310 000)
-
75 000
75 000
385 000
(75 000)
310 000
-
(75 000)
(75 000)
-
90 205
96 306
-
96 306
96 306
-
(102 946)
(102 946)
-
(96 845)
(96 845)
(e) Offsetting of financial assets and financial liabilities
The Group may enter into sales and purchase agreements with the same counterparty in the normal course
of business. The related amount receivable and payable do not always meet the criteria for offsetting in the statement
of financial position. This is because the Group may not have any currently legally enforceable right to offset recognised
amounts, because the right to offset may be enforceable only on the occurrence of future events. In particular,
in accordance with the Russian civil law an obligation can be settled by offsetting against a similar claim if it is due, has
no maturity or is payable on demand.
The following table sets out the carrying amounts of recognised financial instruments that are subject to the above
agreements.
’000 RUB
31 December 2017
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria
Net amounts presented in the statement of financial position
Amounts related to recognised financial instruments that do not meet some or all
of the offsetting criteria
Net amount
31 December 2016
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria
Net amounts presented in the statement of financial position
Amounts related to recognised financial instruments that do not meet some or all
of the offsetting criteria
Net amount
Trade and other
receivables
Trade and other
payables
1 155 608
(65 665)
1 089 943
2 641 689
(65 665)
2 576 025
(1 083 445)
(1 083 445)
6 498
1 492 580
2 356 574
13 602 195
(5 013)
2 351 561
(2 351 561)
(5 013)
13 597 182
(2 351 561)
-
11 245 621
The net amounts presented in the statement of financial position disclosed above form part of trade and other
receivables and trade and other payables, respectively. Other amounts included in these line items do not meet
the criteria for offsetting and are not subject to the agreements described above.
Amounts offset in accordance with IAS 32 offsetting criteria comprise mainly trade payables for goods and bonuses
receivable from suppliers.
Annual Report 2017 FINANCIAL STATEMENTS
104
(f) Fair values
Basis for determination of fair value of financial assets and liabilities is disclosed in note 5. Fair value of Group’s financial
assets and liabilities, including loans and borrowings, approximates their carrying amounts.
(g) Fair value hierarchy
Group’s derivative financial assets and liabilities comprise interest rate swap which is carried at fair value. Fair value
of swap was determined based on observable market data (Level 2 fair value), including forward interest rates.
The Group has no financial assets and liabilities measured at fair value based on unobservable inputs (Level 3 fair value).
Group’s bonds are listed on Moscow Exchange. Fair value of bonds payable was determined for disclosure purposes
based on active market quotations (Level 1 fair value).
(h) Capital management
The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence
and to sustain future development of the business. Neither the Company nor its subsidiaries are subject to externally
imposed capital requirements, except for statutory requirement in relation to minimum level of share capital; the Group
follows this requirement.
31 OPERATING LEASES
Leases as lessee
The Group has both owned and leased land plots. The owned land plots are included in property, plant and equipment.
Leased land plots are treated as operating leases. In case the Group incurs costs directly attributable to acquisition
of operating lease rights, these costs are capitalised as initial cost of land lease and are amortised over the period
of the lease (49-51 years). The further information on leases is detailed below.
When the Group leases land plots under operating leases, the lessors for these leases are State authorities and third
parties. The leases are typically run for 2-3 years, after which long term operating lease contract is concluded
for 49 years.
The Group also rents premises under operating leases. These leases typically run up to 10 years, although some leases
may be for longer periods. Property leases can be renewed based on mutual agreement of the lessor and the Group.
The Group has subleases. Fees payable by the Group for operating leases of stores comprise fixed payments
and contingent rent which is determined as an excess of 2%-6% of the revenue of related stores over the fixed rent rate.
During the year ended 31 December 2017 RUB 5 901 883 thousand was recognised as an expense (including
amortisation of Lease rights amounting to RUB 144 139 thousand) in the profit and loss in respect of operating leases
(2016: RUB 5 518 550 thousand). Contingent rent recognised as an expense for the year ended 31 December 2017
amounted to RUB 241 081 thousand (2016: RUB 467 947 thousand).
At 31 December, the future minimum lease payments under non-cancellable leases were payable as follows.
’000 RUB
Less than one year
Between one and five years
More than five years
2017
2016
2 831 840
3 771 246
11 119 850
25 419 104
39 370 794
14 239 837
30 089 728
48 100 811
O’KEY Group of Companies Leases as lessor
105
The Group leases out its investment property and some space in the buildings of hypermarkets. During the year ended
31 December 2017 RUB 1 738 525 thousand was recognised as rental income in the consolidated statement of profit
or loss and other comprehensive income (2016: RUB 1 620 671 thousand). All leases where the Group is lessor are
cancellable. The Group has contingent rent arrangements.
Contingent rent recognised as income amounted to RUB 100 828 thousand for the year ended 31 December 2017
(2016: RUB 79 877 thousand). Contingent rent is determined as an excess of 4%-20% of the tenant’s revenue over
the fixed rent rate.
32 CAPITAL COMMITMENTS
The Group has capital commitments to acquire property, plant and equipment and
intangible assets amounting to RUB 867 441 thousand as at 31 December 2017 (2016: RUB 1 078 308 thousand).
The capital commitments mostly consist of construction contracts for stores.
33 CONTINGENCIES
(a) Legal proceedings
From time to time and in the normal course of business, claims against the Group are received. On the basis of its own
estimates and both internal and external professional advice management is of the opinion that no material losses will
be incurred in respect of claims.
(b) Taxation contingencies
The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes
in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying
interpretation by different tax authorities.
Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe
fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three
subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events
within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position
in their interpretation and enforcement of tax legislation.
These circumstances may create tax risks in the Russian Federation that are substantially more significant than
in other countries. Management believes that it has provided adequately for the Group’s tax positions based on its
interpretations of applicable Russian tax legislation, official pronouncements and court decisions. In addition to tax
liabilities recognised in these consolidated financial statements, the Group is exposed to uncertain tax positions
for which no provision has been made because management has assessed that additional payments are not probable.
However, the interpretations of the relevant authorities could differ. If the authorities are successful in enforcing their
interpretations, the maximum unrecognised exposures approximate RUB 1 300 million as at 31 December 2017.
(c) Assets pledged or restricted
The Group has the following assets pledged as collateral for loans and borrowings:
’000 RUB
Property, plant and equipment (carrying value)
Total
Note
17
2017
2 471 050
2 471 050
2016
2 529 768
2 529 768
Annual Report 2017 FINANCIAL STATEMENTS
106
34 RELATED PARTY TRANSACTIONS
(a) Major shareholders
As at 31.12.2017 the Company considers as its major shareholders Mr. Troitskii (indirectly holds 33.048%)
and Mr. Volchek (indirectly holds 29.52%); Mr. Korzhev indirectly holds 11.73% shares of the Company.
(b) Transactions with management
(i) Management remuneration
Key management received the following remuneration during the year, which is included in personnel costs (see
note 12)
’000 RUB
Salaries and bonuses
Social security contributions
Long-service bonus
Other payments
2017
339 537
14 490
163 120
6 900
524 047
2016
359 436
10 718
98 358
7 500
476 012
In addition members of Board of Directors received remuneration in the amount of RUB 48 531 thousand for the year
ended 31 December 2017 (2015: RUB 59 942 thousand) which is included in legal and professional expenses.
(c) Transactions with other related parties
Other related parties are entities which belong to the shareholder group (see note 1).
The Group’s other related party transactions are disclosed below.
(i) Revenue
’000 RUB
Services provided:
Other related parties
Transaction value
2017
Transaction value
2016
Trade receivable
2017
Trade receivable
2016
2 402
2 402
2 225
2 225
289
289
94
94
All outstanding balances with related parties are to be settled in cash within six months of the reporting date. None
of the balances are secured.
O’KEY Group of Companies (ii) Expenses
’000 RUB
Other related parties
Including:
Rental fee
Reimbursement of utilities
Reimbursement of other expenses
Other services received:
Other related parties
Finance costs:
Other related parties
107
Transaction value
2017
Transaction value
2016
Prepayments
2017
Prepayments
2016
(831 117)
(788 700)
1 082 999
921 195
(702 645)
(57 771)
(70 701)
(653 097)
(73 197)
(62 406)
-
-
-
-
-
-
(1 618)
(2 756)
3 608
2 143
(71 483)
(904 218)
(81 347)
(872 803)
-
-
1 086 607
923 338
All outstanding balances with related parties, except for prepayments for operating leases, are to be settled in cash
within six months of the reporting date. None of the balances are secured.
Outstanding balance of RUB 1 082 999 thousand as at 31 December 2017 comprises prepayments for rent of hypermarkets
for the period until 2034 amounting to RUB 1 107 623 thousand and current liabilities for rent of hypermarkets in the amount
of RUB 24 624 thousand. Long-term part of prepayments amounting to RUB 906 496 thousand is disclosed in note 21.
Terms of the leases are such that the Group pays rentals which include the reimbursement of all operating expenses related
to these hypermarkets and nearby leased areas and a certain percentage of the Group’s retail revenue from the operation
of these hypermarkets.
Interest costs on loans from related parties amounted to RUB 71 483 thousand for the year ended 31 December 2017
(2016: RUB 81 347 thousand) and were recorded as finance costs in profit or loss.
(iii) Loans
’000 RUB
Loans paid back:
Other related parties
Amount
loaned
2017
Amount
loaned
2016
Outstanding
balance
2017
Outstanding
balance
2016
-
-
(883 096)
(929 960)
The loans from other related parties bear interest at 8% per annum and are payable on demand.
(d) Pricing policies
Related party transactions are not necessarily based on market prices.
35 EVENTS SUBSEQUENT TO THE REPORTING DATE
In January 2018 the Group paid interim dividends to shareholders in the amount of RUB 1 883 083 thousand.
36 BASIS OF MEASUREMENT
The consolidated financial statements are prepared on the historical cost basis except for the following:
» Derivative financial instruments are stated at fair value;
» Liabilities incurred in cash-settled share-based payment transactions are remeasured at fair value;
» Investment property is remeasured at fair value.
Annual Report 2017 FINANCIAL STATEMENTS
108
37 SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been consistently applied to all periods presented in these consolidated
financial statements, and have been applied consistently by Group entities.
(a) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included
in the consolidated financial statements from the date that control commences until the date that control ceases.
The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by
the Group.
(ii) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions,
are eliminated in preparing the consolidated financial statements.
(b) Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange
rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting
date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss
on monetary items is the difference between amortised cost in the functional currency at the beginning of the period,
adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated
at the exchange rate at the end of the reporting period.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated
to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items
in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date
of the transaction.
Foreign currency differences arising in retranslation are recognised in profit or loss.
(ii) Foreign operations
The assets and liabilities of foreign operations are translated to RUB at the exchange rates at the reporting date.
The income and expenses of foreign operations are translated to RUB at exchange rates at the dates of the transactions.
Foreign currency differences are recognised directly in other comprehensive income. Since 1 January 2005,
the Group’s date of transition to IFRSs, such differences have been recognised in the foreign currency translation
reserve. When a foreign operation is disposed of such that control or joint control is lost, the cumulative amount
in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss
on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while
retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When
the Group disposes of only part of its investment in joint venture that includes a foreign operation while retaining joint
control, the relevant proportion of the cumulative amount is reclassified to profit or loss.
Foreign exchange gains and losses arising from a monetary item received from or payable to a foreign operation,
the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net
investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity
in the foreign currency translation reserve.
(c) Financial instruments
Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans
and borrowings, and trade and other payables.
O’KEY Group of Companies (i) Non-derivative financial assets and financial liabilities – recognition and derecognition
109
The Group initially recognises loans and receivables and debt securities issued on the date that they are originated.
All other financial assets and financial liabilities are recognised initially on the trade date at which the Group becomes
a party to the contractual provisions of the instrument.
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it
transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all
the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that
is created or retained by the Group is recognised as a separate asset or liability.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when,
and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise
the asset and settle the liability simultaneously.
(ii) Non-derivative financial assets – measurement
The Group has the following non-derivative financial assets: loans and receivables.
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market.
Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition loans and receivables are measured at amortised cost using the effective interest method, less any
impairment losses.
Loans and receivables comprise trade and other receivables and cash and cash equivalents.
Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less.
Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included
as a component of cash and cash equivalents for the purpose of the statement of cash flows.
(iii) Non-derivative financial liabilities – measurement
The Group has the following non-derivative financial liabilities: loans and borrowings, bank overdrafts, and trade
and other payables.
Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent
to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.
(iv) Derivative financial instruments
The Group holds derivative financial instruments to hedge its interest rate and foreign currency risk exposures.
On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments
and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction,
together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group
makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether
the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows
of the respective hedged items during the period for which the hedge is designated, and whether the actual results
of each hedge are within a range of 80-125 percent. For a cash flow hedge of a forecast transaction, the transaction
should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately
affect reported net income.
Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when
incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted
for as described below.
When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable
to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that
could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised
in other comprehensive income and presented in the hedging reserve in equity. The amount recognised in other
comprehensive income is removed and included in profit or loss in the same period as the hedged cash flows
affect profit or loss under the same line item in the statement of profit and loss and other comprehensive income
as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised immediately
in profit or loss.
Annual Report 2017 FINANCIAL STATEMENTS
110
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised,
or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss
previously recognised in other comprehensive income and presented in the hedging reserve in equity remains there
until the forecast transaction affects profit or loss. If the forecast transaction is no longer expected to occur, then
the balance in other comprehensive income is recognised immediately in profit or loss.
(d) Transactions with owners
(i) Ordinary shares/share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share
options are recognised as a deduction from equity, net of any tax effects.
(ii) Distributions to owners/contributions from owners
The dividends paid to the shareholders are recognised directly in equity once the decision on the payment takes place.
The transfers of assets to the related parties (companies under the control of the Group’s ultimate shareholder group)
or other benefits to such related parties are recognised directly in equity as distributions to the shareholders.
(e) Property, plant and equipment
(i) Recognition and measurement
Items of property, plant and equipment, except for land, are measured at cost less accumulated depreciation
and impairment losses. The cost of property, plant and equipment at 1 January 2005, the date of transition to IFRSs,
was determined by reference to its fair value at that date.
Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets
includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working
condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they
are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related
equipment is capitalised as part of that equipment.
Any gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds
from disposal with the carrying amount of property, plant and equipment, and is recognised net within “other income”
in profit or loss.
(ii) Subsequent costs
The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item
if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be
measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing
of property, plant and equipment are recognised in profit or loss as incurred.
(iii) Depreciation
Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use,
or in respect of internally constructed assets, from the date that the asset is completed and ready for use. Depreciation
is based on the cost of an asset less its residual value. Significant components of individual assets are assessed and if
a component has a useful life that is different from the remainder of that asset, that component is depreciated separately.
Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item
of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future
economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their
useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not
depreciated.
O’KEY Group of Companies The estimated useful lives of significant items of property, plant and equipment for the current and comparative periods
are as follows:
111
» Buildings
» Machinery and equipment, auxiliary facilities
» Motor vehicles
» Leasehold improvements
» Other fixed assets
30 years;
2-20 years;
5-10 years;
over the term of underlying lease;
2-10 years.
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if
appropriate.
(f) Investment property
Investment property is property held by the Group to earn rental income or for capital appreciation and which is not
occupied by the Group.
Investment property, including investment property under construction, is initially recognised at cost, including
transaction costs, and subsequently remeasured at fair value with any change therein recognised in profit or loss. If
fair value of investment property under construction is not reliably determinable, the Group measures that investment
property under construction at cost until either its fair value becomes reliably determinable or construction is
completed (whichever is earlier).
Fair value of the Group’s investment property is determined by independent appraisers, who hold a recognised
and relevant professional qualification and who have recent experience in valuation of property of similar location
and category.
When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date
of reclassification becomes its cost for subsequent accounting.
(g) Intangible assets
(i) Other intangible assets
Other intangible assets that are acquired by the Group have finite useful lives and are measured at cost less
accumulated amortisation and accumulated impairment losses. Other intangible assets primarily include capitalised
computer software, patents and licenses. Acquired computer software, licenses and patents are capitalised on the basis
of the costs incurred to acquire and bring them to use.
(ii) Subsequent expenditure
Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific
asset to which it relates. All other expenditure is recognised in the profit or loss as incurred.
(iii) Amortisation
Amortisation is based on the cost of the asset less its estimated residual value.
Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets
from the date that they are available for use since this most closely reflects the expected pattern of consumption
of future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods
are as follows:
» software licenses
» other intangible assets
1-7 years;
1-5 years.
Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.
Annual Report 2017 FINANCIAL STATEMENTS
112
(h) Leased assets
(i) Operating leases
Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental
to ownership from the lessor to the Group, the total lease payments, including those on expected termination, are
charged to profit or loss on a straight-line basis over the period of the lease.
Where the Group is a lessee in a land lease, the initial cost of land lease is amortised using straight-line method
over the period of lease being up to 51 years. Where the Group is a lessee in a lease of premises, the lease rights are
amortised using straight-line method over the period of lease being up to 8-19 years.
(ii) Finance leases
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified
as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair
value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted
for in accordance with the accounting policy applicable to that asset.
Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate
on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are shown
as other payables (long-term accounts payable for amounts due after 12 months from reporting date). The interest cost
is charged to the profit or loss over the lease period using the effective interest method.
(i) Inventories
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted
moving average principle, and includes expenditure incurred in acquiring the inventories, production or conversion
costs and other costs incurred in bringing them to their existing location and condition.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs
of completion and selling expenses.
(j) Impairment
(i) Financial assets
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine
whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates
that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect
on the estimated future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an
amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer
will enter bankruptcy, observable data indicating that there is measurable decrease in expected cash flows from a group
of financial assets.
The Group considers evidence of impairment for receivables at both a specific asset and collective level. All individually
significant receivables are assessed for specific impairment. All individually significant receivables found not to be
specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified.
Receivables that are not individually significant are collectively assessed for impairment by grouping together
receivables with similar risk characteristics.
In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries
and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit
conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between
its carrying amount, and the present value of the estimated future cash flows discounted at the asset’s original effective
interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest
on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event
causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
O’KEY Group of Companies (ii) Non-financial assets
113
The carrying amounts of the Group’s non-financial assets, other than investment property, inventories and deferred
tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such
indication exists, then the asset’s recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs
to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset
or cash-generating unit. For the purpose of impairment testing, assets that cannot be tested individually are grouped
together into the smallest group of assets that generates cash inflows from continuing use that are largely independent
of the cash inflows of other assets or groups of assets (the “cash-generating unit”).
An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable
amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating
units are allocated to reduce the carrying amount of assets in the unit (group of units) on a pro rata basis.
Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss
has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if
no impairment loss had been recognised.
(k) Employee benefits
(i) Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into
a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions
to defined contribution pension plans, including Russia’s State pension fund, are recognised as an employee benefit
expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are
recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions
to a defined contribution plan that are due more than 12 months after the end of the period in which the employees
render the service are discounted to their present value.
(ii) Other long-term employee benefits
Other long-term employee benefits represent long-service bonuses. Long-term employee benefits are expensed
evenly during the periods in which they are earned by employees.
(iii) Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related
service is provided.
A liability is recognised for the amount expected to be paid under short-term bonus if the Group has a present legal
or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation
can be estimated reliably.
(l) Provisions
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is
recognised as finance cost.
(m) Revenue
Revenue is measured at the fair value of the consideration received or receivable, net of VAT, returns and discounts.
Annual Report 2017 FINANCIAL STATEMENTS
114
(i) Goods sold
Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods,
for retail trade it is normally at the cash register.
(ii) Services
Revenue from services rendered is recognised in profit or loss when the services are rendered, by reference to stage
of completion of the specific transaction assessed on the basis of the actual service provided as a proportion
of the total services to be provided.
Rental income from investment property is recognised in profit or loss on a straight-line basis over the term
of the lease. When assets are leased out under an operating lease, the lease payments receivable are recognised
as rental income on a straight-line basis over the lease term. Lease incentives granted are recognised as an integral part
of the total rental income.
(n) Cost of sales
Cost of sales include the purchase price of the goods sold and other costs incurred in bringing the inventories
to the location and condition ready for sale. These costs include costs of purchasing, packaging and transporting
of goods to the extent that it relates to bringing the inventories to the location and condition ready for sale.
The Group receives various types of bonuses from suppliers of inventories, primarily in the form of volume discounts
and slotting fees. These bonuses are recorded as reduction of cost of sales as the related inventory is sold.
Losses from inventory shortages are recognised in cost of sales.
(o) Finance income and costs
Finance income comprises interest income on issued loans and bank deposits. Interest income is recognised as it
accrues in profit or loss, using the effective interest method.
Finance costs comprise interest expense on borrowings and unwinding of the discount on provisions. Borrowing costs
that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised
in profit or loss using the effective interest method.
Foreign currency gains and losses are reported on a net basis.
(p) Income tax
Income taxes have been provided in the consolidated financial statements in accordance with Russian legislation,
as well as Luxembourg, BVI and Cyprus legislation for corresponding companies of the Group. Income tax expense
comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent
that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted
or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised
for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not
a business combination and that affects neither accounting nor taxable profit or loss, and differences relating
to investments in subsidiaries and joint arrangements to the extent that it is probable that they will not reverse
in the foreseeable future. A deferred tax asset is recognised for unused tax losses, unused tax credits and deductible
temporary differences, to the extent that it is probable that future taxable profits will be available against which they
can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer
probable that the related tax benefit will be realised.
The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group
expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
O’KEY Group of Companies Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they
reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets
and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate
to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend
to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
115
In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company
in the Group may not be set off against taxable profits and current tax liabilities of other Group companies.
In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax
positions and whether additional taxes, penalties and late-payment interest may be due. The Group believes that
its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including
interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve
a series of judgments about future events. New information may become available that causes the Group to change
its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense
in the period that such a determination is made.
(q) Earnings per share
The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated
by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number
of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by
adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares
outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares.
(r) Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn
revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s
other components. All operating segments’ operating results are reviewed regularly by the Group’s CEO to make
decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial
information is available.
(s) Value added tax
Input VAT is generally reclaimable against sales VAT when the right of ownership on purchased goods is transferred
to the Group or when the services are rendered to the Group. The tax authorities permit the settlement of VAT on a net
basis. VAT related to sales and purchases which have not been settled at the balance sheet date (VAT deferred) is
recognised in the statement of financial position on a gross basis and disclosed separately as an asset and liability.
(t) Presentation of the statement of cash flows
The Group reports cash flows from operating activities using direct method. Cash flows from investing activities are
presented net of VAT. VAT paid to suppliers of non-current assets and VAT in proceeds from sale of non-current assets
are presented in line “VAT paid” in operating activities.
(u) Guarantees
The Group considers that financial guarantee contracts entered into by the Group to guarantee the indebtedness
of other parties are insurance arrangements, and accounts for them as such. In this respect, the Group treats
the guarantee contract as a contingent liability until such time as it becomes probable that the Group will be required
to make a payment under the guarantee.
Annual Report 2017 FINANCIAL STATEMENTS
116
(v) New Standards and interpretation not yet adopted
A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December
2017, and have not been applied in preparing these consolidated financial statements. Of these pronouncements,
potentially the following will have an impact on the Group’s operations. The Group plans to adopt these
pronouncements when they become effective.
» IFRS 9 Financial Instruments, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial
instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new
general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition
of financial instruments from IAS 39.
IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted.
The standard will not have a significant impact on the Group’s consolidated financial statements.
» IFRS 15 Revenue from Contracts with Customers establishes a comprehensive framework for determining whether, how
much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11
Construction Contracts and IFRIC 13 Customer Loyalty Programmes. The core principle of the new standard is that an
entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard
results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed
comprehensively and improves guidance for multiple-element arrangements.
IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted.
The standard will not have a significant impact on the Group’s consolidated financial statements.
» IFRS 16 replaces the existing lease accounting guidance in IAS 17 Leases, IFRIC 4 Determining whether an Arrangement
contains a lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving
the Legal Form of a Lease. It eliminates the current dual accounting model for lessees, which distinguishes between
on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet
accounting model that is similar to current finance lease accounting.
Lessor accounting remains similar to current practice – i.e. lessors continue to classify leases as finance and operating
leases.
The Group is a lessee in significant number of operating lease agreements (stores and land plots). Application
of IFRS 16 will result in recognition of these leases as asset on balance sheet. At the same time, a financial liability will
be recognised.
The Group does not intend to adopt this standard early.
The Group has not analysed the likely impact of the new Standard on its financial position or performance.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted.
» Other amended standards and interpretations are not expected to have a significant impact on the Group’s consolidated
financial statements.
O’KEY Group of Companies Glossary
117
Average ticket
Big data
the figure calculated by dividing total sales, net of VAT, at all stores during the relevant year by the
number of tickets in that year
is data sets that are so voluminous and complex that traditional data processing application
software is inadequate to deal with them
Click & Collect
service which allows customers to place orders online for collection in store
Corporate Social Responsibility
(CSR)
responsible attitude in managing our impact on a range of stakeholders: customers, colleagues,
investors, suppliers, the community and the environment
EGAIS
national automated information system for the control of alcohol production and distribution
FMCG (fast–moving consumer
goods)
In-store availability
LFL (like-for-like)
Mystery shopper
Private label (PL)
SKU (stock keeping unit)
Total selling space
Traffic
CAGR
Capex
CEO
CFO
CPI
CRM
DC
FY
GDP
GDR
H
HR
IFRS
IT
K m2
KPI
LSE
M&A
m2
NGO
p.p.
Q
RUB
TMS
WMS
YoY
products that are sold quickly and at relatively low cost
the number of SKUs in-store with a positive stock value as a proportion of the total number of active
SKUs for sale, calculated based on the average daily in-store availability of all open stores
the method of comparing current year sales figures to prior year’s sales figures excluding the
expansion effect
person hired by a market research firm or a manufacturer to visit retail stores, posing as a casual
shopper to collect information about the stores’ display, prices, and quality of their sales staff
brand owned not by a manufacturer or producer, but by a retailer or supplier, who gets its goods
made by a contract manufacturer under its own label
a number assigned to a particular product to identify the price, product options and manufacturer
of the merchandise
the area inside stores used to sell products, excluding areas rented out to third parties, own-
production areas, storage areas and the space between store entry and the cash desk line
the number of tickets issued for the period under review
compounded annual rate of growth
capital expenditure
Chief Executive Officer
Chief Financial Officer
Consumer Price Index
Client Relationship Management
distribution centre
financial year
Gross domestic product
global depositary receipts
half of the year
human resources
International Financial Reporting Standards
Information Technology
a thousand square meters
Key Performance Indicators
London Stock Exchange
Mergers & Acquisitions
square metre
non-governmental organisation
percentage point
quarter of the year
Russian rouble
transport management system
warehouse management system
Year Over Year
Annual Report 2017 118 Contacts
INVESTOR RELATIONS
ADDRESSES
Veronika Kryachko
Head of Investor Relations
+7 495 663 6677 ext. 404
Veronika.Kryachko@okmarket.ru
39/1 Nizhnaya Krasnoselskaya
Street, Moscow, 105066, Russia
8 Shahumyan Avenue,
St. Petersburg, 195027, Russia
www.okeyinvestors.ru
PUBLIC RELATIONS
DEPOSITARY
Kirill Maslentsin
Public Relations and Government
Affairs Director
+7 495 663 6677 ext. 152
Kirill.Maslentsin@okmarket.ru
corpcom@okmarket.ru
Bank of New York Mellon
101 Barclay Street, New York, NY
10286, USA
www.bnymellon.com
AUDITOR
KPMG Luxembourg
39, Avenue John F. Kennedy
Luxembourg
Tel: +352 22 51 51 1
Fax: +352 22 51 71
https://home.kpmg.com/lu/en/
home/about/luxembourg-1.html
O’KEY Group of Companies